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HTTP/2 200 date: Fri, 16 Jan 2026 10:10:41 GMT content-type: application/xml access-control-allow-origin: * cache-control: public, max-age=0, must-revalidate nel: {"report_to":"cf-nel","success_fraction":0.0,"max_age":604800} referrer-policy: strict-origin-when-cross-origin x-content-type-options: nosniff vary: accept-encoding report-to: {"group":"cf-nel","max_age":604800,"endpoints":[{"url":"https://a.nel.cloudflare.com/report/v4?s=3mcSDgomRD66ywVNZb9POhdw8ot%2F8HvXOrdETOTFzsEmI2a%2BVwQWxEYubwPs0WqELRw%2BChJfQSJrxggRBqxwp2mHKifIpEZ2cWSvlJOlEw%3D%3D"}]} etag: W/"996d62331e5ffe495fa9796bbc2cd9a1" content-encoding: gzip server: cloudflare cf-cache-status: DYNAMIC cf-ray: 9becd3127fa43f79-BOM alt-svc: h3=":443"; ma=86400 Snoyberg - Michael Snoyman https://www.snoyman.com Michael Snoyman's homepage and blog. Eclectic collection of programming (mostly Rust and Haskell) and lifting (weights, children, and monads). Zola en Tue, 04 Feb 2025 00:00:00 +0000 Who pays a tax? Tue, 04 Feb 2025 00:00:00 +0000 https://www.snoyman.com/blog/2025/02/who-pays-a-tax/ https://www.snoyman.com/blog/2025/02/who-pays-a-tax/ President Trump has started rolling out his tariffs, something I <a href="https://www.snoyman.com/blog/2024/11/steelmanning-tariffs/">blogged about in November</a>. People are talking about these tariffs a lot right now, with many people (correctly) commenting on how consumers will end up with higher prices as a result of these tariffs. While that part is true, I’ve seen a lot of people taking it to the next, incorrect step: that consumers will pay the entirety of the tax. I <a href="https://x.com/snoyberg/status/1886035800019599808">put up a poll on X</a> to see what people thought, and while the right answer got a lot of votes, it wasn't the winner. <blockquote class="twitter-tweet">Checking on people's general view of taxes. When the government imposes a tax on trade (sales tax, VAT, tariff, or even payroll tax), which party absorbs the cost of the tax?— Michael Snoyman (@snoyberg) <a href="https://twitter.com/snoyberg/status/1886035800019599808?ref_src=twsrc%5Etfw">February 2, 2025</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script> For purposes of this blog post, our ultimate question will be the following: <ul> <li>Suppose apples currently sell for $1 each in the entire United States.</li> <li>There are domestic sellers and foreign sellers of apples, all receiving the same price.</li> <li>There are no taxes or tariffs on the purchase of apples.</li> <li>The question is: if the US federal government puts a $0.50 import tariff per apple, what will be the change in the following: <ul> <li>Number of apples bought in the US</li> <li>Price paid by buyers for apples in the US</li> <li>Post-tax price received by domestic apple producers</li> <li>Post-tax price received by foreign apple producers</li> </ul> </li> </ul> Before we can answer that question, we need to ask an easier, first question: before instituting the tariff, why do apples cost $1? And finally, before we dive into the details, let me provide you with the answers to the ultimate question. I recommend you try to guess these answers before reading this, and if you get it wrong, try to understand why: <ol> <li>The number of apples bought will go down</li> <li>The buyers will pay more for each apple they buy, but not the full amount of the tariff</li> <li>Domestic apple sellers will receive a higher price per apple</li> <li>Foreign apple sellers will receive a lower price per apple, but not lowered by the full amount of the tariff</li> </ol> In other words, regardless of who sends the payment to the government, both taxed parties (domestic buyers and foreign sellers) will absorb some of the costs of the tariff, while domestic sellers will benefit from the protectionism provided by tariffs and be able to sell at a higher price per unit. <h2 id="marginal-benefit">Marginal benefit</h2> All of the numbers discussed below are part of a <a href="https://docs.google.com/spreadsheets/d/14ZbkWpw1B9Q1UDB9Yh47DmdKQfIafVVBKbDUsSIfGZw/edit?usp=sharing">helper Google Sheet</a> I put together for this analysis. Also, apologies about the jagged lines in the charts below, I hadn’t realized before starting on this that there are <a href="https://superuser.com/questions/1359731/how-to-create-a-supply-demand-style-chart">some difficulties with creating supply and demand charts in Google Sheets</a>. Let’s say I absolutely love apples, they’re my favorite food. How much would I be willing to pay for a single apple? You might say “$1, that’s the price in the supermarket,” and in many ways you’d be right. If I walk into supermarket A, see apples on sale for $50, and know that I can buy them at supermarket B for $1, I’ll almost certainly leave A and go buy at B. But that’s not what I mean. What I mean is: how high would the price of apples have to go everywhere so that I’d no longer be willing to buy a single apple? This is a purely personal, subjective opinion. It’s impacted by how much money I have available, other expenses I need to cover, and how much I like apples. But let’s say the number is $5. How much would I be willing to pay for another apple? Maybe another $5. But how much am I willing to pay for the 1,000th apple? 10,000th? At some point, I’ll get sick of apples, or run out of space to keep the apples, or not be able to eat, cook, and otherwise preserve all those apples before they rot. The point being: I’ll be progressively willing to spend less and less money for each apple. This form of analysis is called marginal benefit: how much benefit (expressed as dollars I’m willing to spend) will I receive from each apple? This is a downward sloping function: for each additional apple I buy (quantity demanded), the price I’m willing to pay goes down. This is what gives my personal demand curve. And if we aggregate demand curves across all market participants (meaning: everyone interested in buying apples), we end up with something like this: <img src="/img/who-pays-tax/demand-before-tariff.png" alt="Demand curve before tax" /> Assuming no changes in people’s behavior and other conditions in the market, this chart tells us how many apples will be purchased by our buyers at each price point between $0.50 and $5. And ceteris paribus (all else being equal), this will continue to be the demand curve for apples. <h2 id="marginal-cost">Marginal cost</h2> Demand is half the story of economics. The other half is supply, or: how many apples will I sell at each price point? Supply curves are upward sloping: the higher the price, the more a person or company is willing and able to sell a product. Let’s understand why. Suppose I have an apple orchard. It’s a large property right next to my house. With about 2 minutes of effort, I can walk out of my house, find the nearest tree, pick 5 apples off the tree, and call it a day. 5 apples for 2 minutes of effort is pretty good, right? Yes, there was all the effort necessary to buy the land, and plant the trees, and water them… and a bunch more than I likely can’t even guess at. We’re going to ignore all of that for our analysis, because for short-term supply-and-demand movement, we can ignore these kinds of sunk costs. One other simplification: in reality, supply curves often start descending before ascending. This accounts for achieving efficiencies of scale after the first number of units purchased. But since both these topics are unneeded for understanding taxes, I won’t go any further. Anyway, back to my apple orchard. If someone offers me $0.50 per apple, I can do 2 minutes of effort and get $2.50 in revenue, which equates to a $75/hour wage for me. I’m more than happy to pick apples at that price! However, let’s say someone comes to buy 10,000 apples from me instead. I no longer just walk out to my nearest tree. I’m going to need to get in my truck, drive around, spend the day in the sun, pay for gas, take a day off of my day job (let’s say it pays me $70/hour). The costs go up significantly. Let’s say it takes 5 days to harvest all those apples myself, it costs me $100 in fuel and other expenses, and I lose out on my $70/hour job for 5 days. We end up with: <ul> <li>Total expenditure: $100 + $70 * 8 hours a day * 5 days == $2900</li> <li>Total revenue: $5000 (10,000 apples at $0.50 each)</li> <li>Total profit: $2100</li> </ul> So I’m still willing to sell the apples at this price, but it’s not as attractive as before. And as the number of apples purchased goes up, my costs keep increasing. I’ll need to spend more money on fuel to travel more of my property. At some point I won’t be able to do the work myself anymore, so I’ll need to pay others to work on the farm, and they’ll be slower at picking apples than me (less familiar with the property, less direct motivation, etc.). The point being: at some point, the number of apples can go high enough that the $0.50 price point no longer makes me any money. This kind of analysis is called marginal cost. It refers to the additional amount of expenditure a seller has to spend in order to produce each additional unit of the good. Marginal costs go up as quantity sold goes up. And like demand curves, if you aggregate this data across all sellers, you get a supply curve like this: <img src="/img/who-pays-tax/supply-before-tariff.png" alt="Supply curve before tariff" /> <h2 id="equilibrium-price">Equilibrium price</h2> We now know, for every price point, how many apples buyers will purchase, and how many apples sellers will sell. Now we find the equilibrium: where the supply and demand curves meet. This point represents where the marginal benefit a buyer would receive from the next buyer would be less than the cost it would take the next seller to make it. Let’s see it in a chart: <img src="/img/who-pays-tax/supply-demand-before-tariff.png" alt="Supply and demand before tariff" /> You’ll notice that these two graphs cross at the $1 price point, where 63 apples are both demanded (bought by consumers) and supplied (sold by producers). This is our equilibrium price. We also have a visualization of the surplus created by these trades. Everything to the left of the equilibrium point and between the supply and demand curves represents surplus: an area where someone is receiving something of more value than they give. For example: <ul> <li>When I bought my first apple for $1, but I was willing to spend $5, I made $4 of consumer surplus. The consumer portion of the surplus is everything to the left of the equilibrium point, between the supply and demand curves, and above the equilibrium price point.</li> <li>When a seller sells his first apple for $1, but it only cost $0.50 to produce it, the seller made $0.50 of producer surplus. The producer portion of the surplus is everything to the left of the equilibrium point, between the supply and demand curves, and below the equilibrium price point.</li> </ul> Another way of thinking of surplus is “every time someone got a better price than they would have been willing to take.” OK, with this in place, we now have enough information to figure out how to price in the tariff, which we’ll treat as a negative externality. <h2 id="modeling-taxes">Modeling taxes</h2> Alright, the government has now instituted a $0.50 tariff on every apple sold within the US by a foreign producer. We can generally model taxes by either increasing the marginal cost of each unit sold (shifting the supply curve up), or by decreasing the marginal benefit of each unit bought (shifting the demand curve down). In this case, since only some of the producers will pay the tax, it makes more sense to modify the supply curve. First, let’s see what happens to the foreign seller-only supply curve when you add in the tariff: <img src="/img/who-pays-tax/supply-tariff-shift.png" alt="Foreign supply shift from tariff" /> With the tariff in place, for each quantity level, the price at which the seller will sell is $0.50 higher than before the tariff. That makes sense: if I was previously willing to sell my 82nd apple for $3, I would now need to charge $3.50 for that apple to cover the cost of the tariff. We see this as the tariff “pushing up” or “pushing left” the original supply curve. We can add this new supply curve to our existing (unchanged) supply curve for domestic-only sellers, and we end up with a result like this: <img src="/img/who-pays-tax/supply-curves-post-tariff.png" alt="Supply curves post tariff" /> The total supply curve adds up the individual foreign and domestic supply curves. At each price point, we add up the total quantity each group would be willing to sell to determine the total quantity supplied for each price point. Once we have that cumulative supply curve defined, we can produce an updated supply-and-demand chart including the tariff: <img src="/img/who-pays-tax/supply-demand-post-tariff.png" alt="Supply and demand post tariff" /> As we can see, the equilibrium has shifted: <ul> <li>The equilibrium price paid by consumers has risen from $1 to $1.20.</li> <li>The total number of apples purchased has dropped from 63 apples to 60 apples.</li> <li>Consumers therefore received 3 less apples. They spent $72 for these 60 apples, whereas previously they spent $63 for 3 more apples, a definite decrease in consumer surplus.</li> <li>Foreign producers sold 36 of those apples (see the raw data in the linked Google Sheet), for a gross revenue of $43.20. However, they also need to pay the tariff to the US government, which accounts for $18, meaning they only receive $25.20 post-tariff. Previously, they sold 42 apples at $1 each with no tariff to be paid, meaning they took home $42.</li> <li>Domestic producers sold the remaining 24 apples at $1.20, giving them a revenue of $28.80. Since they don’t pay the tariff, they take home all of that money. By contrast, previously, they sold 21 apples at $1, for a take-home of $21.</li> <li>The government receives $0.50 for each of the 60 apples sold, or in other words receives $30 in revenue it wouldn’t have received otherwise.</li> </ul> We could be more specific about the surpluses, and calculate the actual areas for consumer surplus, producer surplus, inefficiency from the tariff, and government revenue from the tariff. But I won’t bother, as those calculations get slightly more involved. Instead, let’s just look at the aggregate outcomes: <ul> <li>Consumers were unquestionably hurt. Their price paid went up by $0.20 per apple, and received less apples.</li> <li>Foreign producers were also hurt. Their price received went down from the original $1 to the new post-tariff price of $1.20, minus the $0.50 tariff. In other words: foreign producers only receive $0.70 per apple now. This hurt can be mitigated by shifting sales to other countries without a tariff, but the pain will exist regardless.</li> <li>Domestic producers scored. They can sell less apples and make more revenue doing it.</li> <li>And the government walked away with an extra $30.</li> </ul> Hopefully you now see the answer to the original questions. Importantly, while the government imposed a $0.50 tariff, neither side fully absorbed that cost. Consumers paid a bit more, foreign producers received a bit less. The exact details of how that tariff was split across the groups is mediated by the relevant supply and demand curves of each group. If you want to learn more about this, the relevant search term is “price elasticity,” or how much a group’s quantity supplied or demanded will change based on changes in the price. <h2 id="other-taxes">Other taxes</h2> Most taxes are some kind of a tax on trade. Tariffs on apples is an obvious one. But the same applies to income tax (taxing the worker for the trade of labor for money) or payroll tax (same thing, just taxing the employer instead). Interestingly, you can use the same model for analyzing things like tax incentives. For example, if the government decided to subsidize domestic apple production by giving the domestic producers a $0.50 bonus for each apple they sell, we would end up with a similar kind of analysis, except instead of the foreign supply curve shifting up, we’d see the domestic supply curve shifting down. And generally speaking, this is what you’ll always see with government involvement in the economy. It will result in disrupting an existing equilibrium, letting the market readjust to a new equilibrium, and incentivization of some behavior, causing some people to benefit and others to lose out. We saw with the apple tariff, domestic producers and the government benefited while others lost. You can see the reverse though with tax incentives. If I give a tax incentive of providing a deduction (not paying income tax) for preschool, we would end up with: <ul> <li>Government needs to make up the difference in tax revenue, either by raising taxes on others or printing more money (leading to inflation). Either way, those paying the tax or those holding government debased currency will pay a price.</li> <li>Those people who don’t use the preschool deduction will receive no benefit, so they simply pay a cost.</li> <li>Those who do use the preschool deduction will end up paying less on tax+preschool than they would have otherwise.</li> </ul> This analysis is fully amoral. It’s not saying whether providing subsidized preschool is a good thing or not, it simply tells you where the costs will be felt, and points out that such government interference in free economic choice does result in inefficiencies in the system. Once you have that knowledge, you’re more well educated on making a decision about whether the costs of government intervention are worth the benefits. The Paradox of Necessary Force Thu, 16 Jan 2025 00:00:00 +0000 https://www.snoyman.com/blog/2025/01/paradox-necessary-force/ https://www.snoyman.com/blog/2025/01/paradox-necessary-force/ Humans want the resources of other humans. I want the food that the supermarket owns so that I can eat it. Before buying it, I wanted the house that I now own. And before that, someone wanted to build a house on that plot of land, which was owned by someone else first. Most of the activities we engage in during our lifetime revolve around extracting something from someone else. There are two basic modalities to getting the resources of someone else. The first, the simplest, and the one that has dominated the majority of human history, is force. Conquer people, kill them, beat them up and take their stuff, force them into slavery and make them do your work. It’s a somewhat effective strategy. This can also be more subtle, by using coercive and fraudulent methods to trick people into giving you their resources. Let’s call this modality the looter approach. The second is trade. In the world of trade, I can only extract resources from someone else when they willingly give them to me in exchange for something else of value. This can be barter of value for value, payment in money, built-up goodwill, favors, charity (exchanging resources for the benefit you receive for helping someone else), and more. In order to participate in this modality, you need to create your own valuable resources that other people want to trade for. Let’s call this the producer approach. The producer approach is better for society in every conceivable way. The looter approach causes unnecessary destruction, pushes production into ventures that don’t directly help anyone (like making more weapons), and rewards people for their ability to inflict harm. By contrast, the producer approach rewards the ability to meet the needs of others and causes resources to end up in the hands of those who value them the most. Looter philosophy is rooted in the concept of the zero sum game, the mistaken belief that I can only have more if someone else has less. By contrast, the producer philosophy correctly identifies the fact that we can all end up better by producing more goods in more efficient ways. We live in our modern world of relatively widespread luxury because producers have made technological leaps—for their own self-serving motives—that have improved everyone’s ability to produce more goods going forward. Think of the steam engine, electricity, computing power, and more. <h1 id="a-producer-only-world">A producer-only world</h1> It would be wonderful to live in a world in which there are no looters. We all produce, we all trade, everyone receives more value than they give, and there is no wasted energy or destruction from the use of force. Think about how wonderful it could be! We wouldn’t need militaries, allowing a massive amount of productive capacity to be channeled into things that make everyone’s lives better. We wouldn’t need police. Not only would that free up more resources, but would remove the threat of improper use of force by the state against citizens. The list goes on and on. I believe many economists—especially Austrian economists—are cheering for that world. I agree with them on the cheering. It’s why things like Donald Trump’s plans for tariffs are so horrific in their eyes. Tariffs introduce an artificial barrier between nations, impeding trade, preventing the peaceful transfer of resources, and leading to a greater likelihood of armed conflict. There’s only one problem with this vision, and it’s also based in economics: game theory. <h1 id="game-theory-and-looters">Game theory and looters</h1> Imagine I’m a farmer. I’m a great farmer, I have a large plot of land, I run my operations efficiently, and I produce huge amounts of food. I sell that food into the marketplace, and with that money I’m able to afford great resources from other people, who willingly trade them to me because they value the money more than their own resources. For example, how many T-shirts does the clothing manufacturer need? Instead of his 1,000th T-shirt, he’d rather sell it for $5 and buy some food. While I’m really great as a farmer, I’m not very good as a fighter. I have no weapons training, I keep no weapons on my property, and I dislike violence. And finally, there’s a strong, skilled, unethical person down the street. He could get a job with me on the farm. For back-breaking work 8 hours a day, I’ll pay him 5% of my harvest. Or, by contrast, he could act like the mafia, demand a “protection fee” of 20%, and either beat me up, beat up my family, or cause harm to my property, if I don’t pay it. In other words, he could be a producer and get 5% in exchange for hard work, or be a looter and get 20% in exchange for easy (and, likely for him, fun) work. As described, the game theoretic choice is clear. So how do we stop a producer world from devolving back into a looter world? <h1 id="deterrence">Deterrence</h1> There’s only one mechanism I’m aware of for this, and it’s deterrence. As the farmer, I made a mistake. I should get weapons training. I should keep weapons on my farm. I should be ready to defend myself and my property. Because if I don’t, game theory ultimately predicts that all trade will collapse, and society as we know it will crumble. I don’t necessarily have to have the power of deterrence myself. I could hire a private security company, once again allowing the producer world to work out well. I trade something of lesser value (some money) for something I value more (the protection afforded by private security). If I’m lucky, that security company will never need to do anything, because the mere threat of their presence is sufficient. And in modern society, we generally hope to rely on the government police force to provide this protection. There are easy ways to defeat the ability of deterrence to protect our way of life. The simplest is to defang it. Decriminalize violent and destructive acts, for example. Remove the consequences for bad, looter behavior, and you will incentivize looting. This is far from a theoretical discussion. We’ve seen the clear outcome in California, which has decriminalized theft under $950, resulting—in a completely predictable way—in more theft, stores closing, and an overall erosion of producer philosophy. And in California, this is even worse. Those who try to be their own deterrence, by arming themselves and protecting their rights, are often the targets of government force instead of the looters. I’m guessing this phrasing has now split my reading audience into three groups. Group A agrees wholly with what I’m saying. Group B believes what I’ve just written is pure evil and garbage. Group C initially disagreed with my statements, but has an open mind and is willing to consider a different paradigm. The next section is targeted at groups A and C. Group B: good luck with the broken world you’re advocating. <h1 id="global-scale">Global scale</h1> This concept of deterrence applies at a global scale too. I would love to live in a world where all nations exchange value for value and never use force against others. In fact, I believe the ultimate vision for this kind of a world ends with anarcho-capitalism (though I don’t know enough about the topic to be certain). There ends up being no need for any force against anyone else. It’s a beautiful vision for a unified world, where there are no borders, there is no destruction, there is only unity through trade. I love it. But game theory destroys this too. If the entire world disarmed, it would take just one person who thinks he can do better through looter tactics to destroy the system. The only way to defeat that is to have a realistic threat of force to disincentivize someone from acting like a looter. And this is the paradox. In order to live in our wonderful world of production, prosperity, health, and happiness, we always need to have our finger near enough to the trigger to respond to looters with force. I know of no other approach that allows production to happen. (And I am very interested in other theoretical solutions to this problem, if anyone wants to share reading material.) <h1 id="peace-through-strength">Peace through strength</h1> This line of thinking leads to the concept of <a href="https://en.wikipedia.org/wiki/Peace_through_strength">peace through strength</a>. When those tempted to use violence see the overwhelming strength of their potential victims, they will be disincentivized to engage in violent behavior. It’s the story of the guy who wants to rob my farm. Or the roaming army in the ancient world that bypassed the well fortified walled city and attacked its unprotected neighbor. There are critics of this philosophy. As put by Andrew Bacevich, "'Peace through strength' easily enough becomes 'peace through war.'" I don’t disagree at all with that analysis, and it’s something we must remain vigilant against. But disarming is not the answer, as it will, of course, necessarily lead to the victory of those willing to use violence on others. In other words, my thesis here is that the threat of violence must be present to keep society civilized. But the cost of using that violence must be high enough that neither side is incentivized to initiate it. <h1 id="israel">Israel</h1> I’d been thinking of writing a blog post on this topic for a few months now, but finally decided to today. Israel just agreed to a hostage deal with Hamas. In exchange for the release of 33 hostages taken in the October 7 massacre, Israel will hand over 1,000 terrorists in Israeli prisons. I have all the sympathy in the world for the hostages and their families. I also have great sympathy for the Palestinian civilians who have been harmed, killed, displaced, and worse by this war. And I have empathy (as one of the victims) for all of the Israeli citizens who have lived under threat of rocket attacks, had our lives disrupted, and for those who have been killed by this war. War is hell, full stop. My message here is to those who have been pushing the lie of “peace through negotiations.” Or peace through capitulation. Or anything else. These tactics are the reason the war has continued. As long as the incentive structure makes initiating a war a positive, wars will continue to be initiated. Hamas has made its stance on the matter clear: it has sworn for the eradication of all Jews within the region, and considers civilian casualties on the Palestinian side not only acceptable, but advantageous. <img src="/img/civilian-bloodshed.png" alt="Gaza Chief's Brutal Calculation: Civilian Bloodshed Will Help Hamas" /> I know that many people who criticize Israel and put pressure on us to stop the war in Gaza believe they are doing so for noble reasons. (For the record, I also believe many people have less altruistic reasons for their stance.) I know people like to point to the list of atrocities they believe Israel has committed. And, by contrast, the pro-Israel side is happy to respond with corresponding atrocities from the other side. I honestly believe this is all far beyond irrelevant. The only question people should be asking is: how do we disincentivize the continuation of hostilities? And hostage deals that result in the release of terrorists, allow “aid” to come in (which, if history is any indication, will be used to further the construction of tunnels and other sources for attack on Israel), and give Hamas an opportunity to rearm, only incentivize the continuation of the war. In other words, if you care about the innocent people on either side, you should be opposed to this kind of capitulation. Whatever you think about the morality of each side, more people will suffer with this approach. <h1 id="skin-in-the-game">Skin in the game</h1> It’s easy to say things like that when your life isn’t on the line. I also don’t think that matters much. Either the philosophical, political, and economic analysis is correct, or it isn’t. Nonetheless, I do have skin in the game here. I still live in a warzone. I am less than 15 kilometers from the Lebanese border. We’ve had Hezbollah tunnels reaching into our surrounding cities. My family had to lock ourselves inside when Hezbollah paratroopers had attempted to land in our city. My wife (Miriam) and I have discussed this situation at length, many times, over the course of this war. If I’m ever taken hostage, I hope the Israeli government bombs the hell out of wherever I am being held. I say this not only because I believe it is the right, just, moral, ethical, and strategically correct thing to do. I say this because I am selfish: <ul> <li>I would rather die than be tortured by our enemies.</li> <li>I would rather die than be leveraged to make my family and country less safe.</li> <li>I would rather die than live the rest of my life a shell of my former self, haunted not only by the likely torture inflicted on me, but by the guilt of the harm to others resulting from my spared life.</li> </ul> I don’t know why this hostage deal went through now. I don’t know what pressures have been brought to bear on the leaders in Israel. I don’t know if they are good people trying to protect their citizens, nefarious power hungry cretins looking to abuse both the Israeli and Palestinian populace to stay in control, weak-willed toadies who do what they’re told by others, or simply stupid. But my own stance is clear. <h1 id="but-what-about-the-palestinians">But what about the Palestinians?</h1> I said it above, and I’ll say it again: I truly do feel horrible for the trauma that the Palestinian people are going through. Not for the active terrorists mind you, I feel no qualms about those raising arms against us being destroyed. But everyone else, even those who wish me and my fellow Israelis harm. (And, if polling is to be believed, that’s the majority of Palestinians.) I would much rather that they not be suffering now, and that eventually through earned trust on both sides, everyone’s lots are improved. But the framework being imposed by those who “love” peace isn’t allowing that to happen. Trust cannot be built when there’s a greater incentive to return to the use of force. I was strongly opposed to the 2005 disengagement from Gaza. But once it happened, it could have been one of those trust-building starting points. Instead, I saw many people justify further violence by Hamas—such as non-stop rocket attacks on the south of Israel—because Israel hadn’t done enough yet. Notice how fundamentally flawed this mentality is, just from an incentives standpoint! Israel gives up control of land, something against its own overall interests and something desired by Palestinians, and is punished for it with increased violence against citizens. Hamas engaged in a brutal destruction of all of its opponents within the Palestinian population, launched attacks on Israel, and when Israel did respond with force, Israel was blamed for having not done enough to appease Hamas. I know people will want to complicate this story by bringing up the laundry list of past atrocities, of assigning negative motivations to Israel and its leaders, and a million other evasions that are used to avoid actually solving this conflict. Instead, I beg everyone to just use basic logic. The violence will continue as long as the violence gets results. Incentives Determine Outcomes Mon, 13 Jan 2025 00:00:00 +0000 https://www.snoyman.com/blog/2025/01/incentives-determine-outcomes/ https://www.snoyman.com/blog/2025/01/incentives-determine-outcomes/ My blog posts and reading material have both been on a decidedly economics-heavy slant recently. The topic today, incentives, squarely falls into the category of economics. However, when I say economics, I’m not talking about “analyzing supply and demand curves.” I’m talking about the true basis of economics: understanding how human beings make decisions in a world of scarcity. A fair definition of incentive is “a reward or punishment that motivates behavior to achieve a desired outcome.” When most people think about economic incentives, they’re thinking of money. If I offer my son $5 if he washes the dishes, I’m incentivizing certain behavior. We can’t guarantee that he’ll do what I want him to do, but we can agree that the incentive structure itself will guide and ultimately determine what outcome will occur. The great thing about monetary incentives is how easy they are to talk about and compare. “Would I rather make $5 washing the dishes or $10 cleaning the gutters?” But much of the world is incentivized in non-monetary ways too. For example, using the “punishment” half of the definition above, I might threaten my son with losing Nintendo Switch access if he doesn’t wash the dishes. No money is involved, but I’m still incentivizing behavior. And there are plenty of incentives beyond our direct control! My son is also incentivized to not wash dishes because it’s boring, or because he has some friends over that he wants to hang out with, or dozens of other things. Ultimately, the conflicting array of different incentive structures placed on him will ultimately determine what actions he chooses to take. <h2 id="why-incentives-matter">Why incentives matter</h2> A phrase I see often in discussions—whether they are political, parenting, economic, or business—is “if they could just do…” Each time I see that phrase, I cringe a bit internally. Usually, the underlying assumption of the statement is “if people would behave contrary to their incentivized behavior then things would be better.” For example: <ul> <li>If my kids would just go to bed when I tell them, they wouldn’t be so cranky in the morning.</li> <li>If people would just use the recycling bin, we wouldn’t have such a landfill problem.</li> <li>If people would just stop being lazy, our team would deliver our project on time.</li> </ul> In all these cases, the speakers are seemingly flummoxed as to why the people in question don’t behave more rationally. The problem is: each group is behaving perfectly rationally. <ul> <li>The kids have a high time preference, and care more about the joy of staying up now than the crankiness in the morning. Plus, they don’t really suffer the consequences of morning crankiness, their parents do.</li> <li>No individual suffers much from their individual contribution to a landfill. If they stopped growing the size of the landfill, it would make an insignificant difference versus the amount of effort they need to engage in to properly recycle.</li> <li>If a team doesn’t properly account for the productivity of individuals on a project, each individual receives less harm from their own inaction. Sure, the project may be delayed, company revenue may be down, and they may even risk losing their job when the company goes out of business. But their laziness individually won’t determine the entirety of that outcome. By contrast, they greatly benefit from being lazy by getting to relax at work, go on social media, read a book, or do whatever else they do when they’re supposed to be working.</li> </ul> <img src="/img/incentives/free-candy.png" alt="Free Candy!" /> My point here is that, as long as you ignore the reality of how incentives drive human behavior, you’ll fail at getting the outcomes you want. If everything I wrote up until now made perfect sense, you understand the premise of this blog post. The rest of it will focus on a bunch of real-world examples to hammer home the point, and demonstrate how versatile this mental model is. <h2 id="running-a-company">Running a company</h2> Let’s say I run my own company, with myself as the only employee. My personal revenue will be 100% determined by my own actions. If I decide to take Tuesday afternoon off and go fishing, I’ve chosen to lose that afternoon’s revenue. Implicitly, I’ve decided that the enjoyment I get from an afternoon of fishing is greater than the potential revenue. You may think I’m being lazy, but it’s my decision to make. In this situation, the incentive–money–is perfectly aligned with my actions. Compare this to a typical company/employee relationship. I might have a bank of Paid Time Off (PTO) days, in which case once again my incentives are relatively aligned. I know that I can take off 15 days throughout the year, and I’ve chosen to use half a day for the fishing trip. All is still good. What about unlimited time off? Suddenly incentives are starting to misalign. I don’t directly pay a price for not showing up to work on Tuesday. Or Wednesday as well, for that matter. I might ultimately be fired for not doing my job, but that will take longer to work its way through the system than simply not making any money for the day taken off. Compensation overall falls into this misaligned incentive structure. Let’s forget about taking time off. Instead, I work full time on a software project I’m assigned. But instead of using the normal toolchain we’re all used to at work, I play around with a new programming language. I get the fun and joy of playing with new technology, and potentially get to pad my resume a bit when I’m ready to look for a new job. But my current company gets slower results, less productivity, and is forced to subsidize my extracurricular learning. When a CEO has a bonus structure based on profitability, he’ll do everything he can to make the company profitable. This might include things that actually benefit the company, like improving product quality, reducing internal red tape, or finding cheaper vendors. But it might also include destructive practices, like slashing the R&D budget to show massive profits this year, in exchange for a catastrophe next year when the next version of the product fails to ship. <img src="/img/incentives/golden-ceo.png" alt="Golden Parachute CEO" /> Or my favorite example. My parents owned a business when I was growing up. They had a back office where they ran operations like accounting. All of the furniture was old couches from our house. After all, any money they spent on furniture came right out of their paychecks! But in a large corporate environment, each department is generally given a budget for office furniture, a budget which doesn’t roll over year-to-year. The result? Executives make sure to spend the entire budget each year, often buying furniture far more expensive than they would choose if it was their own money. There are plenty of details you can quibble with above. It’s in a company’s best interest to give people downtime so that they can come back recharged. Having good ergonomic furniture can in fact increase productivity in excess of the money spent on it. But overall, the picture is pretty clear: in large corporate structures, you’re guaranteed to have mismatches between the company’s goals and the incentive structure placed on individuals. Using our model from above, we can lament how lazy, greedy, and unethical the employees are for doing what they’re incentivized to do instead of what’s right. But that’s simply ignoring the reality of human nature. <h1 id="moral-hazard">Moral hazard</h1> Moral hazard is a situation where one party is incentivized to take on more risk because another party will bear the consequences. Suppose I tell my son when he turns 21 (or whatever legal gambling age is) that I’ll cover all his losses for a day at the casino, but he gets to keep all the winnings. What do you think he’s going to do? The most logical course of action is to place the largest possible bets for as long as possible, asking me to cover each time he loses, and taking money off the table and into his bank account each time he wins. <img src="/img/incentives/headstails.png" alt="Heads I win, tails you lose" /> But let’s look at a slightly more nuanced example. I go to a bathroom in the mall. As I’m leaving, I wash my hands. It will take me an extra 1 second to turn off the water when I’m done washing. That’s a trivial price to pay. If I don’t turn off the water, the mall will have to pay for many liters of wasted water, benefiting no one. But I won’t suffer any consequences at all. This is also a moral hazard, but most people will still turn off the water. Why? Usually due to some combination of other reasons such as: <ol> <li>We’re so habituated to turning off the water that we don’t even consider not turning it off. Put differently, the mental effort needed to not turn off the water is more expensive than the 1 second of time to turn it off.</li> <li>Many of us have been brought up with a deep guilt about wasting resources like water. We have an internal incentive structure that makes the 1 second to turn off the water much less costly than the mental anguish of the waste we created.</li> <li>We’re afraid we’ll be caught by someone else and face some kind of social repercussions. (Or maybe more than social. Are you sure there isn’t a law against leaving the water tap on?)</li> </ol> Even with all that in place, you may notice that many public bathrooms use automatic water dispensers. Sure, there’s a sanitation reason for that, but it’s also to avoid this moral hazard. A common denominator in both of these is that the person taking the action that causes the liability (either the gambling or leaving the water on) is not the person who bears the responsibility for that liability (the father or the mall owner). Generally speaking, the closer together the person making the decision and the person incurring the liability are, the smaller the moral hazard. It’s easy to demonstrate that by extending the casino example a bit. I said it was the father who was covering the losses of the gambler. Many children (though not all) would want to avoid totally bankrupting their parents, or at least financially hurting them. Instead, imagine that someone from the IRS shows up at your door, hands you a credit card, and tells you you can use it at a casino all day, taking home all the chips you want. The money is coming from the government. How many people would put any restriction on how much they spend? And since we’re talking about the government already… <h2 id="government-moral-hazards">Government moral hazards</h2> As I was preparing to write this blog post, the California wildfires hit. The discussions around those wildfires gave a huge number of examples of moral hazards. I decided to cherry-pick a few for this post. The first and most obvious one: California is asking for disaster relief funds from the federal government. That sounds wonderful. These fires were a natural disaster, so why shouldn’t the federal government pitch in and help take care of people? The problem is, once again, a moral hazard. In the case of the wildfires, California and Los Angeles both had ample actions they could have taken to mitigate the destruction of this fire: better forest management, larger fire department, keeping the water reservoirs filled, and probably much more that hasn’t come to light yet. If the federal government bails out California, it will be a clear message for the future: your mistakes will be fixed by others. You know what kind of behavior that incentivizes? More risky behavior! Why spend state funds on forest management and extra firefighters—activities that don’t win politicians a lot of votes in general—when you could instead spend it on a football stadium, higher unemployment payments, or anything else, and then let the feds cover the cost of screw-ups. You may notice that this is virtually identical to the 2008 “too big to fail” bail-outs. Wall Street took insanely risky behavior, reaped huge profits for years, and when they eventually got caught with their pants down, the rest of us bailed them out. “Privatizing profits, socializing losses.” <img src="/img/incentives/toobig.png" alt="Too big to fail" /> And here’s the absolute best part of this: I can’t even truly blame either California or Wall Street. (I mean, I do blame them, I think their behavior is reprehensible, but you’ll see what I mean.) In a world where the rules of the game implicitly include the bail-out mentality, you would be harming your citizens/shareholders/investors if you didn’t engage in that risky behavior. Since everyone is on the hook for those socialized losses, your best bet is to maximize those privatized profits. There’s a lot more to government and moral hazard, but I think these two cases demonstrate the crux pretty solidly. But let’s leave moral hazard behind for a bit and get to general incentivization discussions. <h1 id="non-monetary-competition">Non-monetary competition</h1> At least 50% of the economics knowledge I have comes from the very first econ course I took in college. That professor was amazing, and had some very colorful stories. I can’t vouch for the veracity of the two I’m about to share, but they definitely drive the point home. In the 1970s, the US had an oil shortage. To “fix” this problem, they instituted price caps on gasoline, which of course resulted in insufficient gasoline. To “fix” this problem, they instituted policies where, depending on your license plate number, you could only fill up gas on certain days of the week. (Irrelevant detail for our point here, but this just resulted in people filling up their tanks more often, no reduction in gas usage.) Anyway, my professor’s wife had a friend. My professor described in great detail how attractive this woman was. I’ll skip those details here since this is a PG-rated blog. In any event, she never had any trouble filling up her gas tank any day of the week. She would drive up, be told she couldn’t fill up gas today, bat her eyes at the attendant, explain how helpless she was, and was always allowed to fill up gas. This is a demonstration of non-monetary compensation. Most of the time in a free market, capitalist economy, people are compensated through money. When price caps come into play, there’s a limit to how much monetary compensation someone can receive. And in that case, people find other ways of competing. Like this woman’s case: through using flirtatious behavior to compensate the gas station workers to let her cheat the rules. The other example was much more insidious. Santa Monica had a problem: it was predominantly wealthy and white. They wanted to fix this problem, and decided to put in place rent controls. After some time, they discovered that Santa Monica had become wealthier and whiter, the exact opposite of their desired outcome. Why would that happen? Someone investigated, and ended up interviewing a landlady that demonstrated the reason. She was an older white woman, and admittedly racist. Prior to the rent controls, she would list her apartments in the newspaper, and would be legally obligated to rent to anyone who could afford it. Once rent controls were in place, she took a different tact. She knew that she would only get a certain amount for the apartment, and that the demand for apartments was higher than the supply. That meant she could be picky. She ended up finding tenants through friends-of-friends. Since it wasn’t an official advertisement, she wasn’t legally required to rent it out if someone could afford to pay. Instead, she got to interview people individually and then make them an offer. Normally, that would have resulted in receiving a lower rental price, but not under rent controls. So who did she choose? A young, unmarried, wealthy, white woman. It made perfect sense. Women were less intimidating and more likely to maintain the apartment better. Wealthy people, she determined, would be better tenants. (I have no idea if this is true in practice or not, I’m not a landlord myself.) Unmarried, because no kids running around meant less damage to the property. And, of course, white. Because she was racist, and her incentive structure made her prefer whites. You can deride her for being racist, I won’t disagree with you. But it’s simply the reality. Under the non-rent-control scenario, her profit motive for money outweighed her racism motive. But under rent control, the monetary competition was removed, and she was free to play into her racist tendencies without facing any negative consequences. <h2 id="bureaucracy">Bureaucracy</h2> These were the two examples I remember for that course. But non-monetary compensation pops up in many more places. One highly pertinent example is bureaucracies. Imagine you have a government office, or a large corporation’s acquisition department, or the team that apportions grants at a university. In all these cases, you have a group of people making decisions about handing out money that has no monetary impact on them. If they give to the best qualified recipients, they receive no raises. If they spend the money recklessly on frivolous projects, they face no consequences. Under such an incentivization scheme, there’s little to encourage the bureaucrats to make intelligent funding decisions. Instead, they’ll be incentivized to spend the money where they recognize non-monetary benefits. This is why it’s so common to hear about expensive meals, gift bags at conferences, and even more inappropriate ways of trying to curry favor with those that hold the purse strings. Compare that ever so briefly with the purchases made by a small mom-and-pop store like my parents owned. Could my dad take a bribe to buy from a vendor who’s ripping him off? Absolutely he could! But he’d lose more on the deal than he’d make on the bribe, since he’s directly incentivized by the deal itself. It would make much more sense for him to go with the better vendor, save $5,000 on the deal, and then treat himself to a lavish $400 meal to celebrate. <h1 id="government-incentivized-behavior">Government incentivized behavior</h1> This post is getting longer in the tooth than I’d intended, so I’ll finish off with this section and make it a bit briefer. Beyond all the methods mentioned above, government has another mechanism for modifying behavior: through directly changing incentives via legislation, regulation, and monetary policy. Let’s see some examples: <ul> <li>Artificial modification of interest rates encourages people to take on more debt than they would in a free capital market, leading to <a href="https://en.wikipedia.org/wiki/Malinvestment">malinvestment</a> and a consumer debt crisis, and causing the boom-bust cycle we all painfully experience.</li> <li>Going along with that, giving tax breaks on interest payments further artificially incentivizes people to take on debt that they wouldn’t otherwise.</li> <li>During COVID-19, at some points unemployment benefits were greater than minimum wage, incentivizing people to rather stay home and not work than get a job, leading to reduced overall productivity in the economy and more printed dollars for benefits. In other words, it was a perfect recipe for inflation.</li> <li>The tax code gives deductions to “help” people. That might be true, but the real impact is incentivizing people to make decisions they wouldn’t have otherwise. For example, giving out tax deductions on children encourages having more kids. Tax deductions on childcare and preschools incentivizes dual-income households. Whether or not you like the outcomes, it’s clear that it’s government that’s encouraging these outcomes to happen.</li> <li>Tax incentives cause people to engage in behavior they wouldn’t otherwise (daycare+working mother, for example).</li> <li>Inflation means that the value of your money goes down over time, which encourages people to spend more today, when their money has a larger impact. (Milton Friedman described this as <a href="https://www.youtube.com/watch?v=ZwNDd2_beTU">high living</a>.)</li> </ul> <h1 id="conclusion">Conclusion</h1> The idea here is simple, and fully encapsulated in the title: incentives determine outcomes. If you want to know how to get a certain outcome from others, incentivize them to want that to happen. If you want to understand why people act in seemingly irrational ways, check their incentives. If you’re confused why leaders (and especially politicians) seem to engage in destructive behavior, check their incentives. We can bemoan these realities all we want, but they are realities. While there are some people who have a solid internal moral and ethical code, and that internal code incentivizes them to behave against their externally-incentivized interests, those people are rare. And frankly, those people are self-defeating. People should take advantage of the incentives around them. Because if they don’t, someone else will. (If you want a literary example of that last comment, see the horse in Animal Farm.) How do we improve the world under these conditions? Make sure the incentives align well with the overall goals of society. To me, it’s a simple formula: <ul> <li>Focus on free trade, value for value, as the basis of a society. In that system, people are always incentivized to provide value to other people.</li> <li>Reduce the size of bureaucracies and large groups of all kinds. The larger an organization becomes, the farther the consequences of decisions are from those who make them.</li> <li>And since the nature of human beings will be to try and create areas where they can control the incentive systems to their own benefits, make that as difficult as possible. That comes in the form of strict limits on government power, for example.</li> </ul> And even if you don’t want to buy in to this conclusion, I hope the rest of the content was educational, and maybe a bit entertaining! A secure Bitcoin self custody strategy Mon, 23 Dec 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/12/secure-bitcoin-self-custody/ https://www.snoyman.com/blog/2024/12/secure-bitcoin-self-custody/ Up until this year, my Bitcoin custody strategy was fairly straightforward, and likely familiar to other hodlers: <ul> <li>Buy a hardware wallet</li> <li>Put the seed phrase on steel plates</li> <li>Secure those steel plates somewhere on my property</li> </ul> But in October of last year, the situation changed. I live in Northern Israel, close to the Lebanese border. The past 14 months have involved a lot of rocket attacks, including destruction of multiple buildings in my home town. This brought into question how to properly secure my sats. Importantly, I needed to balance two competing goals: <ol> <li>Resiliency of the saved secrets against destruction. In other words: make sure I didn't lose access to the wallet.</li> <li>Security against attackers trying to steal those secrets. In other words: make sure no one else got access to the wallet.</li> </ol> I put some time into designing a solution to these conflicting goals, and would like to share some thoughts for others looking to improve their BTC custody strategy. And if anyone has any recommendations for improvements, I'm all ears! <h2 id="goals">Goals</h2> <ul> <li>Self custody I didn't want to rely on an external custody company. Not your keys, not your coins.</li> <li>Full access I always maintain full access to my funds, without relying on any external party.</li> <li>Computer hack resilient If my computer systems are hacked, I will not lose access to or control of my funds (neither stolen nor lost).</li> <li>Physical destruction resilient If my hardware device and steel plates are both destroyed (as well as anything else physically located in my home town), I can still recovery my funds.</li> <li>Will survive me If I'm killed, I want my wife, children, or other family members to be able to recover and inherit my BTC.</li> </ul> <h2 id="multisig">Multisig</h2> The heart of this protection mechanism is a multisig wallet. Unfortunately, interfaces for setting up multisig wallets are tricky. I'll walk through the basics and then come back to how to set it up. The concept of a multisig is that your wallet is protected by multiple signers. Each signer can be any "normal" wallet, e.g. a software or hardware wallet. You choose a number of signers and a threshold of signers required to perform a transaction. For example, a 2 of 2 multisig would mean that 2 wallets can sign transactions, and both of them need to sign to make a valid transaction. A 3 of 5 would mean 5 total signers, any 3 of them being needed to sign a transaction. For my setup, I set up a 2 of 3 multisig, with the 3 signers being a software wallet, a hardware wallet, and SLIP39 wallet. Let's go through each of those, explain how they work, and then see how the solution addresses the goals. <h2 id="software-wallet">Software wallet</h2> I set up a software wallet and saved the seed phrase in a dedicated password manager account using Bitwarden. Bitwarden offers an emergency access feature, which essentially means a trusted person can be listed as an emergency contact and can recover your account. The process includes a waiting period, during which the account owner can reject the request. Put another way: Bitwarden is offering a cryptographically secure, third party hosted, fully managed, user friendly dead-man switch. Exactly what I needed. I added a select group of trusted people as the recoverers on the account. Otherwise, I keep the account securely locked down in Bitwarden and can use it for signing when necessary. Let's see how this stacks up against the goals: <ul> <li>Self custody Check, no reliance on anyone else</li> <li>Full access Check, I have access to the wallet at all times</li> <li>Computer hack resilient Fail, if my system is hacked, I lose control of the wallet</li> <li>Physical destruction resilient Check, Bitwarden lives beyond my machines</li> <li>Will survive me Check thanks to the dead-man switch</li> </ul> <h2 id="hardware-wallet">Hardware wallet</h2> Not much to say about the hardware wallet setup that I haven't said already. Let's do the goals: <ul> <li>Self custody Check, no reliance on anyone else</li> <li>Full access Check, I have access to the wallet at all times</li> <li>Computer hack resilient Check, the private keys never leave the hardware device</li> <li>Physical destruction resilient Fail, the wallet and plates could easily be destroyed, and the plates could easily be stolen. (The wallet could be stolen too, but thanks to the PIN mechanism would theoretically be resistant to compromise. But that's not a theory I'd want to bet my wealth on.)</li> <li>Will survive me Check, anyone can take my plates and recover the wallet</li> </ul> <h2 id="slip39">SLIP39</h2> This one requires a bit of explanation. SLIP39 is a not-so-common standard for taking some data and splitting it up into a number of shards. You can define the threshold of shards necessary to reconstruct the original secret. This uses an algorithm called <a href="https://en.wikipedia.org/wiki/Shamir's_secret_sharing">Shamir's Secret Sharing</a>. (And yes, it is very similar in function to multisig, but implemented differently). The idea here is that this wallet is controlled by a group of friends and family members. Without getting into my actual setup, I could choose 7 very trusted individuals from all over the world and tell them that, should I contact them and ask for them, they should send me their shards so I can reconstruct that third wallet. And to be especially morbid, they also know the identity of some backup people in the event of my death. In any event, the idea is that if enough of these people agree to, they can reconstruct the third wallet. The assumption is that these are all trustworthy people. But even with trustworthy people, (1) I could be wrong about how trustworthy they are, or (2) they could be coerced or tricked. So let's see how these security mechanism stands up: <ul> <li>Self custody Fail, I'm totally reliant on others.</li> <li>Full access Fail, by design I don't keep this wallet myself, so I must rely on others.</li> <li>Computer hack resilient Check, the holders of these shards keep them in secure, offline storage.</li> <li>Physical destruction resilient Check (sort of), since the probability of all copies being destroyed or stolen is negligible.</li> <li>Will survive me Check, by design</li> </ul> <h2 id="comparison-against-goals">Comparison against goals</h2> We saw how each individual wallet stacked up against the goals. How about all of them together? Well, there are certainly some theoretical ways I could lose the funds, e.g. my hardware wallet and plates are destroyed and a majority of shard holders for the SLIP39 lost their shards. However, if you look through the check/fail lists, every category has at least two checks. Meaning: on all dimensions, if some catastrophe happens, at least two of the wallets should survive. Now the caveats (I seem to like that word). I did a lot of research on this, and this is at least tangential to my actual field of expertise. But I'm not a dedicated security researcher, and can't really claim full, deep understanding of all these topics. So if I made any mistakes here, please let me know. <h2 id="how-to-guide">How-to guide</h2> OK, so how do you actually get a system like this running? I'll give you my own step-by-step guide. Best case scenario for all this: download all the websites and programs mentioned onto a fresh Linux system install, disconnect the internet, run the programs and copy down any data as needed, and then wipe the system again. (Or, alternatively, do all the actions from a Live USB session.) <ol> <li>Set up the SLIP39. You can use an <a href="https://iancoleman.io/slip39/">online generator</a>. Choose the number of bits of entropy (IMO 128bit is sufficient), choose the total shares and threshold, and then copy down the phrases.</li> <li>Generate the software wallet. You can use a <a href="https://iancoleman.io/bip39/">sister site to the SLIP39 generator</a>. Choose either 12 or 24 words, and write those words down. On a different, internet-connected computer, you can save those words into a Bitwarden account, and set it up with appropriate emergency access.</li> <li>Open up <a href="https://electrum.org/">Electrum</a>. (Other wallets, like <a href="https://sparrowwallet.com/">Sparrow</a>, probably work for this too, but I've only done it with Electrum.) The rest of this section will include a step-by-step guide through the Electrum steps. And yes, I took these screenshots on a Mac, but for a real setup use a Linux machine.</li> </ol> Set up a new wallet. Enter a name (doesn't matter what) and click next. <img src="https://image.nostr.build/18ca27095ba566fbee61c3f5e2b657d91394b5e955b660a38cfd00baa2d3ef4d.png" alt="New wallet" /> Choose a multisig wallet and click next. <img src="https://image.nostr.build/f088c7f3a3014adf9f1f778bec23d84e5ba91cd7812e892935f39a334b220bf8.png" alt="Multisig" /> Choose 3 cosigners and require 2 signatures. <img src="https://image.nostr.build/d26f78cdca0a5924faed7bde45b2262fe02b3e130adbcac052b053ffd8eebc6b.png" alt="Signer count" /> Now we're going to enter all three wallets. The first one will be your hardware device. Click next, then follow all the prompts to set it up. <img src="https://image.nostr.build/29f1dd5ec0782c2b3b9a45b3659e9d7786e36df98f0bbbffa0cd8e5095ed8958.png" alt="Hardware" /> After a few screens (they'll be different based on your choice of hardware device), you'll be prompted to select a derivation path. Use native segwit and the standard derivation path. <img src="https://image.nostr.build/07e1f3c950faeda9c4a84675fb3115033f65f5d834a8a4c923e0af16a6d11523.png" alt="segwit" /> This next screen was the single most complicated for me, simply because the terms were unclear. First, you'll see a <code>Zpub</code> string displayed as a "master public key," e.g.: <pre style="background-color:#fdf6e3;"> <code>Zpub75J9cLwa3iX1zB2oiTdvGDf4EyHWN1ZYs5gVt6JSM9THA6XLUoZhA4iZwyruCKHpw8BFf54wbAK6XdgtMLa2TgbDcftdsietCuKQ6eDPyi6 </code></pre> You need to write this down. It's the same as an xpub, but for multisig wallets. This represents all the possible public keys for your hardware wallet. Putting together the three <code>Zpub</code> values will allow your software of choice to generate all the receiving and change addresses for your new wallet. You'll need all three, so don't lose them! But on their own, they cannot be used to access your funds. Therefore, treat them with "medium" security. Backing up in Bitwarden with your software wallet is a good idea, and potentially simply sending to some friends to back up just in case. And that explanation brings us back to the three choices on the screen. You can choose to either enter a cosigner key, a cosigner seed, or use another hardware wallet. The difference between key and seed is that the former is public information only, whereas the latter is full signing power. Often, multisig wallets are set up by multiple different people, and so instead of sharing the seed with each other (a major security violation), they each generate a seed phrase and only share the key with each other. However, given that you're setting up the wallet with access to all seed phrases, and you're doing it on an airgapped device, it's safe to enter the seed phrases directly. And I'd recommend it, to avoid the risk of generating the wrong master key from a seed. So go ahead and choose "enter cosigner seed" and click next. <img src="https://image.nostr.build/12460a29f30656f1d507952127e54e548e2488adb4fec2c0e8f1f8d3226ac2de.png" alt="Add cosigner 2" /> And now onto the second most confusing screen. I copied my seed phrase into this text box, but it won't let me continue! <img src="https://image.nostr.build/5b23d3d205ae7e52935bc42869d4e57135830acebe84070c9251782d95f757e3.png" alt="Cannot continue" /> The trick is that Electrum, by default, uses its own concept of seed phrases. You need to click on "Options" and then choose BIP39, and then enter your seed phrase. <img src="https://image.nostr.build/61d16652ed4cf231a3fcece212005a581d05bb361e5e324ee5a7b569b15cb78f.png" alt="BIP39" /> Continue through the other screens until you're able to enter the final seed. This time, instead of choosing BIP39, choose SLIP39. You'll need to enter enough of the SLIP39 shards to meet the threshold. <img src="https://image.nostr.build/1783da39985111f75cd6a95791df2e0a6243298b0906f434674dd3e1a61132e7.png" alt="SLIP39" /> And with that, you can continue through the rest of the screens, and you'll now have a fully operational multisig! <img src="https://image.nostr.build/e33dd69e0c177d43000eed5c07233bd19560125125b8ac26478d1e79aa2b1298.png" alt="Addresses" /> Open up Electrum again on an internet-connected computer. This time, connect the hardware wallet as before, enter the BIP39 as before, but for the SLIP39, enter the master key instead of the SLIP39 seed phrase. This will ensure that no internet connected device ever has both the software wallet and SLIP39 at the same time. You should confirm that the addresses on the airgapped machine match the addresses on the internet connected device. If so, you're ready for the final test. Send a small amount of funds into the first receiving address, and then use Electrum on the internet connected device to (1) confirm in the history that it arrived and (2) send it back to another address. You should be asked to sign with your hardware wallet. If you made it this far, congratulations! You're the proud owner of a new 2of3 multisig wallet. <h2 id="conclusion">Conclusion</h2> I hope the topic of death and war wasn't too terribly morbid for others. But these are important topics to address in our world of self custody. I hope others found this useful. And once again, if anyone has recommendations for improvements to this setup, please do let me know! Normal People Shouldn't Invest Wed, 18 Dec 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/12/normal-people-shouldnt-invest/ https://www.snoyman.com/blog/2024/12/normal-people-shouldnt-invest/ The world we live in today is inflationary. Through the constant increase in the money supply by governments around the world, the purchasing power of any dollars (or other government money) sitting in your wallet or bank account will go down over time. To simplify massively, this leaves people with three choices: <ol> <li>Keep your money in fiat currencies and earn a bit of interest. You’ll still lose purchasing power over time, because inflation virtually always beats interest, but you’ll lose it more slowly.</li> <li>Try to beat inflation by investing in the stock market and other <a href="https://www.investopedia.com/terms/r/risk-on-risk-off.asp">risk-on investments</a>.</li> <li>Recognize that the game is slanted against you, don’t bother saving or investing, and spend all your money today.</li> </ol> (Side note: if you’re reading this and screaming at your screen that there’s a much better option than any of these, I’ll get there, don’t worry.) <h2 id="high-living-and-melting-ice-cubes">High living and melting ice cubes</h2> Option 3 is what we’d call “high time preference.” It means you value the consumption you can have today over the potential savings for the future. In an inflationary environment, this is unfortunately a very logical stance to take. Your money is worth more today than it will ever be later. May as well live it up while you can. Or as Milton Friedman put it, engage in <a href="https://www.youtube.com/watch?v=ZwNDd2_beTU">high living</a>. But let’s ignore that option for the moment, and pursue some kind of low time preference approach. Despite the downsides, we want to hold onto our wealth for the future. The first option, saving in fiat, would work with things like checking accounts, savings accounts, Certificates of Deposit (CDs), government bonds, and perhaps corporate bonds from highly rated companies. There’s little to no risk in those of losing your original balance or the interest (thanks to FDIC protection, a horrible concept I may dive into another time). And the downside is also well understood: you’re still going to lose wealth over time. Or, to quote James from <a href="https://youtube.com/@investanswers">InvestAnswers</a>, you can hold onto some melting ice cubes. But with sufficient interest, they’ll melt a little bit slower. <h2 id="the-investment-option">The investment option</h2> With that option sitting on the table, many people end up falling into the investment bucket. If they’re more risk-averse, it will probably be a blend of both risk-on stock investment and risk-off fiat investment. But ultimately, they’re left with some amount of money that they want to put into a risk-on investment. The only reason they’re doing that is on the hopes that between price movements and dividends, the value of their investment will grow faster than anything else they can choose. You may be bothered by my phrasing. “The only reason.” Of course that’s the only reason! We only put money into investments in order to make more money. What other possible reason exists? Well, the answer is that while we invest in order to make money, that’s not the only reason. That would be like saying I started a tech consulting company to make money. Yes, that’s a true reason. But the purpose of the company is to meet a need in the market: providing consulting services. Like every economic activity, starting a company has a dual purpose: making a profit, but by providing actual value. So what actual value is generated for the world when I choose to invest in a stock? Let’s rewind to real investment, and then we’ll see how modern investment differs. <h2 id="michael-midas-mulligan">Michael (Midas) Mulligan</h2> Let’s talk about a fictional character, Michael Mulligan, aka Midas. In Atlas Shrugged, he’s the greatest banker in the country. He created a small fortune for himself. Then, using that money, he very selectively invested in the most promising ventures. He put his own wealth on the line because he believed each of those ventures had a high likelihood to succeed. He wasn’t some idiot who jumps on his CNBC show to spout nonsense about which stocks will go up and down. He wasn’t a venture capitalist who took money from others and put it into the highest-volatility companies hoping that one of them would 100x and cover the massive losses on the others. He wasn’t a hedge fund manager who bets everything on financial instruments so complex he can’t understand them, knowing that if it crumbles, the US government will bail him out. And he wasn’t a normal person sitting in his house, staring at candlestick charts, hoping he can outsmart every other person staring at those same charts by buying in and selling out before everyone else. No. Midas Mulligan represented the true gift, skill, art, and value of real investment. In the story, we find out that he was the investor who got Hank Rearden off the ground. Hank Rearden uses that investment to start a steel empire that drives the country, and ultimately that powers his ability to invest huge amounts of his new wealth into research into an even better metal that has the promise to reshape the world. That’s what investment is. And that’s why investment has such a high reward associated with it. It’s a massive gamble that may produce untold value for society. The effort necessary to determine the right investments is high. It’s only right that Midas Mulligan be well compensated for his work. And by compensating him well, he’ll have even more money in the future to invest in future projects, creating a positive feedback cycle of innovation and improvements. <h2 id="michael-crappy-investor-snoyman">Michael (Crappy Investor) Snoyman</h2> I am not Midas Mulligan. I don’t have the gift to choose the winners in newly emerging markets. I can’t sit down with entrepreneurs and guide them to the best way to make their ideas thrive. And I certainly don’t have the money available to make such massive investments, much less the psychological profile to handle taking huge risks with my money like that. I’m a low time preference individual by my upbringing, plus I am very risk-averse. I spent most of my adult life putting money into either the house I live in or into risk-off assets. I discuss this background more in <a href="https://www.snoyman.com/blog/2024/11/my-path-to-bitcoin/">a blog post on my current investment patterns</a>. During the COVID-19 money printing, I got spooked about this, realizing that the melting ice cubes were melting far faster than I had ever anticipated. It shocked me out of my risk-averse nature, realizing that if I didn’t take a more risky stance with my money, ultimately I’d lose it all. So like so many others, I diversified. I put money into stock indices. I realized the stock market was risky, so I diversified further. I put money into various cryptocurrencies too. I learned to read candlestick charts. I made some money. I felt pretty good. I started feeling more confident overall, and started trying to predict the market. I fixated on this. I was nervous all the time, because my entire wealth was on the line constantly. And it gets even worse. In economics, we have the concept of an opportunity cost. If I invest in company ABC and it goes up 35% in a month, I’m a genius investor, right? Well, if company DEF went up 40% that month, I can just as easily kick myself for losing out on the better opportunity. In other words, once you’re in this system, it’s a constant rat race to keep finding the best possible returns, not simply being happy with keeping your purchasing power. Was I making the world a better place? No, not at all. I was just another poor soul trying to do a better job of entering and exiting a trade than the next guy. It was little more than riding a casino. And yes, I ultimately lost a massive amount of money through this. <h2 id="normal-people-shouldn-t-invest">Normal people shouldn’t invest</h2> Which brings me to the title of this post. I don’t believe normal people should be subjected to this kind of investment. It’s an extra skill to learn. It’s extra life stress. It’s extra risk. And it doesn’t improve the world. You’re being rewarded—if you succeed at all—simply for guessing better than others. (Someone out there will probably argue efficient markets and that having everyone trading stocks like this does in fact add some efficiencies to capital allocation. I’ll give you a grudging nod of agreement that this is somewhat true, but not sufficiently enough to justify the returns people anticipate from making “good” gambles.) The only reason most people ever consider this is because they feel forced into it, otherwise they’ll simply be sitting on their melting ice cubes. But once they get into the game, between risk, stress, and time investment, they’re lives will often get worse. One solution is to not be greedy. Invest in stock market indices, don’t pay attention to day-to-day price, and assume that the stock market will continue to go up over time, hopefully beating inflation. And if that’s the approach you’re taking, I can honestly say I think you’re doing better than most. But it’s not the solution I’ve landed on. <h2 id="option-4-deflation">Option 4: deflation</h2> The problem with all of our options is that they are built in a broken world. The fiat/inflationary world is a rigged game. You’re trying to walk up an escalator that’s going down. If you try hard enough, you’ll make progress. But the system is against you. This is inherent to the design. The inflation in our system is so that central planners have the undeserved ability to appropriate productive capacity in the economy to do whatever they want with it. They can use it to fund government welfare programs, perform scientific research, pay off their buddies, and fight wars. Whatever they want. If you take away their ability to print money, your purchasing power will not go down over time. In fact, the opposite will happen. More people will produce more goods. Innovators will create technological breakthroughs that will create better, cheaper products. Your same amount of money will buy more in the future, not less. A low time preference individual will be rewarded. By setting aside money today, you’re allowing productive capacity today to be invested into building a stronger engine for tomorrow. And you’ll be rewarded by being able to claim a portion of that larger productive pie. And to reiterate: in today’s inflationary world, if you defer consumption and let production build a better economy, you are punished with reduced purchasing power. So after burying the lead so much, my option 4 is simple: Bitcoin. It’s not an act of greed, trying to grab the most quickly appreciating asset. It’s about putting my money into a system that properly rewards low time preference and saving. It’s admitting that I have no true skill or gift to the world through my investment capabilities. It’s recognizing that I care more about destressing my life and focusing on things I’m actually good at than trying to optimize an investment portfolio. Can Bitcoin go to 0? Certainly, though year by year that likelihood is becoming far less likely. Can Bitcoin have major crashes in its price? Absolutely, but I’m saving for the long haul, not for a quick buck. I’m hoping for a world where deflation takes over. Where normal people don’t need to add yet another stress and risk to their life, and saving money is the most natural, safest, and highest-reward activity we can all do. <h2 id="further-reading">Further reading</h2> <ul> <li><a href="https://www.snoyman.com/blog/2024/10/buying-bitcoin-or-selling-dollars/">Buying Bitcoin or selling dollars?</a> (my own blog post)</li> <li><a href="https://www.snoyman.com/blog/2024/11/my-path-to-bitcoin/">My Path to Bitcoin</a> (also my own blog post)</li> <li><a href="https://medium.com/@vijayboyapati/the-bullish-case-for-bitcoin-6ecc8bdecc1">The Bullish Case for Bitcoin</a> (great explanation of the monetization of Bitcoin)</li> </ul> Hello Nostr Tue, 17 Dec 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/12/hello-nostr/ https://www.snoyman.com/blog/2024/12/hello-nostr/ This blog post is in the style of my <a href="https://www.snoyman.com/blog/2018/05/guide-to-matrix-riot/">previous blog post on Matrix</a>. I'm reviewing and sharing onboarding experience with a new technology. I'm sharing in the hopes that it will help others become aware of this new technology, understand what it can do, and if people are intrigued, have a more pleasant onboarding experience. Just keep in mind: I'm in no way an expert on this. PRs welcome to improve the content here! <ul> <li><a href="https://nostr.com/">https://nostr.com/</a></li> <li><a href="https://nostr.org/">https://nostr.org/</a></li> <li><a href="https://nostr.how/">https://nostr.how/</a></li> <li><a href="https://github.com/aljazceru/awesome-nostr">https://github.com/aljazceru/awesome-nostr</a></li> <li><a href="https://njump.me/nevent1qgsr7acdvhf6we9fch94qwhpy0nza36e3tgrtkpku25ppuu80f69kfqqypw05fjshncr453ltvtvn67swrv2zhz8xvwxcjxr7vl8wse6lv6njzum09e">Onboarding post from Derek Ross</a></li> <li><a href="https://njump.me/nevent1qgsrtuazdng7waddzmdd3nyw36w5sfvler95vgcte9nreqf8jtwlyvgqyz3htukyplqltu65rlcx4p7fa2w8c5r39mg05ghaj9ae9saqlyr277geeeu">Onboarding post from Rod</a></li> </ul> <h2 id="what-is-nostr-why-nostr">What is Nostr? Why Nostr?</h2> I’d describe Nostr as decentralized social media. It’s a protocol for people to identify themselves via public key cryptography (thus no central identity service), publish various kinds of information, access through any compatible client, and interact with anyone else. At its simplest, it’s a Twitter/X clone, but it offers much more functionality than that (though I’ve barely scratched the surface). Nostr has a high overlap with the Bitcoin ecosystem, including built-in micropayments (zaps) via the Lightning Network, an instantaneous peer-to-peer payment layer built on top of Bitcoin. I'll start off by saying: right now, Nostr's user experience is not on a par with centralized services like X. But I can see a lot of promise. The design of the protocol encourages widespread innovation, as demonstrated by the plethora of clients and other tools to access the protocol. Decentralized/federated services are more difficult to make work flawlessly, but the advantages in terms of freedom of expression, self-custody of your data, censorship resistance, and ability to build more featureful tools on top of it make me excited. I was skeptical (to say the least) about the idea of micropayments built into social media. But I'm beginning to see the appeal. Firstly, getting away from an advertiser-driven business model fixes the age old problem of "if you're not paying for a service, you're the product." But I see a deeper social concept here too. I intend to blog more in the future on the topic of non-monetary competition and compensation. But in short, in the context of social media: every social network ends up making its own version of imaginary internet points (karma, moderator privileges, whatever you want to call it). Non-monetary compensation has a lot of downsides, which I won't explore here. Instead, making the credit system based on money with real-world value has the promise to vastly improve social media interactions. Did that intrigue you enough to want to give this a shot? Awesome! Let me give you an overview of the protocol, and then we'll dive into my recommendation on getting started. <h2 id="protocol-overview">Protocol overview</h2> The basics of the protocol can be broken down into: <ul> <li>Relays</li> <li>Events</li> <li>Identities</li> <li>Clients</li> </ul> As a decentralized protocol, Nostr relies on public key cryptography for identities. That means, when you interact on the network, you'll use a private key (represented as an <code>nsec</code> value) to sign your messages, and will be identified by your public key (represented as an <code>npub</code> value). Anyone familiar with Bitcoin or cryptocurrency will be familiar with the keys vs wallet divide, and it lines up here too. Right off the bat, we see the first major advantage of Nostr: no one controls your identity except you. Clients are how a user will interact with the protocol. You'll provide your identity to the client in one of a few ways: <ul> <li>Directly entering your <code>nsec</code>. This is generally frowned upon since it opens you up for exploit, though most mobile apps work by direct <code>nsec</code> entry.</li> <li>Getting a view-only experience in clients that support it by entering your <code>npub</code>.</li> <li>Using a signing tool to perform the signing on behalf of the client without giving away your private keys to everyone. (This matches most web3 interactions that rely on a wallet browser extension.)</li> </ul> Events are a general-purpose concept, and are the heart of Nostr interaction. Events can represent a note (similar to a Tweet), articles, likes, reposts, profile updates, and more. Anything you do on the protocol involves creating and signing an event. This is also the heart of Nostr's extensibility: new events can be created to support new kinds of interactions. Finally there are relays. Relays are the servers of the Nostr world, and are where you broadcast your events to. Clients will typically configure multiple relays, broadcast your events to those relays, and query relays for relevant events for you (such as notes from people you follow, likes on your posts, and more). <h2 id="getting-started">Getting started</h2> This is where the suboptimal experience really exists for Nostr. It took me a few days to come up with a setup that worked reliably. I'm going to share what worked best for me, but keep in mind that there are many other options. I'm a novice; other guides may give different recommendations and you may not like my selection of tools. My best recommendation: don't end up in shell shock like I did. Set up any kind of a Nostr profile, introduce yourself with the <code>#introductions</code> hashtag, and ask for help. I've found the community unbelievably welcoming. Alright, so here are the different pieces you're going to need for a full experience: <ul> <li>Browser extension for signing</li> <li>Web client</li> <li>Mobile client</li> <li>Lightning wallet</li> <li>A Nostr address</li> </ul> I'm going to give you a set of steps that I hope both provides easy onboarding while still leaving you with the ability to more directly control your Nostr experience in the future. <h3 id="lightning-wallet-coinos">Lightning wallet: coinos</h3> First, you're going to set up a Lightning wallet. There are a lot of options here, and there are a lot of considerations between ease-of-use, self-custody, and compatibility with other protocols. I tried a bunch. My recommendation: use <a href="https://coinos.io/">coinos</a>. It's a custodial wallet (meaning: they control your money and you're trusting them), so don't put any large sums into it. But coinos is really easy to use, and supports Nostr Wallet Connect (NWC). After you set up your account, click on the gear icon, and then click on "Reveal Connection String." You'll want to use that when setting up your clients. Also, coinos gives you a Lightning address, which will be <code><username>@coinos.io</code>. You'll need that for setting up your profile on Nostr. <h3 id="web-client-yakihonne">Web client: YakiHonne</h3> I tried a bunch of web clients and had problems with almost all of them. I later realized most of my problems seemed to be caused by incorrectly set relays, which we'll discuss below. In any event, I ultimately chose <a href="https://yakihonne.com/">YakiHonne</a>. It also has mobile iOS and Android clients, so you can have a consistent experience. (I also used the Damus iOS client, which is also wonderful.) Go to the homepage, click on the Login button in the bottom-left, and then choose "Create an account." You can add a profile picture, banner image, choose a display name, and add a short description. In the signup wizard, you'll see an option to let YakiHonne set up a wallet (meaning a Lightning wallet) for you. I chose not to rely on this and used coinos instead to keep more flexibility for swapping clients in the future. If you want to simplify, however, you can just use the built-in wallet. Before going any further, make sure you back up your <code>nsec</code> secret key!!! Click on your username in the bottom-left, then settings, and then "Your keys." I recommend saving both your <code>nsec</code> and <code>npub</code> values in your password manager. <img src="/img/hello-nostr/yakikeys.png" alt="YakiHonne keys" /> No, this isn't my actual set of keys, this was a test profile I set up while writing this post. Within that settings page, click on "wallets," then click on the plus sign next to add wallets, and choose "Nostr wallet connect." Paste the NWC string you got from coinos, and you'll be able to zap people money! Next, go back to settings and choose "Edit Profile." Under "Lightning address," put your <code><username>@coinos.io</code> address. Now you'll also be able to receive zaps from others. Another field you'll notice on the profile is NIP-05. That's your Nostr address. Let's talk about getting that set up. <h3 id="nip-05-nostr-address">NIP-05 Nostr address</h3> Remembering a massive <code>npub</code> address is a pain. Instead, you'll want to set up a NIP-05 address. (NIP stands for Nostr Implementation Possibilities, you can see <a href="https://github.com/nostr-protocol/nips/blob/master/05.md">NIP-05 on GitHub</a>.) There are many services—both paid and free—to get a NIP-05 address. You can see a <a href="https://github.com/aljazceru/awesome-nostr?tab=readme-ov-file#nip-05-identity-services">set of services on AwesomeNostr</a>. Personally, I decided to set up an identifier on my own domain. You can <a href="https://www.snoyman.com/.well-known/nostr.json">see my live nostr.json file</a>, which at time of writing supports: <ul> <li><code>michael@snoyman.com</code> and an alias <code>snoyberg@snoyman.com</code></li> <li>The special <code>_@snoyman.com</code>, which actually means "the entire domain itself"</li> <li>And an identifier for my wife as well, <code>miriam@snoyman.com</code></li> </ul> If you host this file yourself, keep in mind these two requirements: <ul> <li>You cannot have any redirects at that URL! If your identifier is <code>name@domain</code>, the URL <code>https://domain/.well-known/nostr.json?name=<name></code> must resolve directly to this file.</li> <li>You need to set CORS headers appropriately to allow for web client access, specifically the response header <code>access-control-allow-origin: *</code>.</li> </ul> Once you have that set up, add your Nostr address to your profile on YakiHonne. Note that you'll need the hex version of your <code>npub</code>, which you can generate by using the <a href="https://nak.nostr.com/">Nostr Army Knife</a>: <img src="/img/hello-nostr/nok.png" alt="Nostr Army Knife" /> BONUS I decided to also set up my own Lightning wallet address, by rehosting the Lightning config file from <code>https://coinos.io/.well-known/lnurlp/snoyberg</code> on my domain at <code>https://snoyman.com/.well-known/lnurlp/michael</code>. <h3 id="signer">Signer</h3> As far as I can tell, <a href="https://getalby.com/">Alby</a> provides the most popular Nostr signing browser extension. The only problem I had with it was confusion about all the different things it does. Alby provides a custodial lightning wallet via Alby Hub, plus a mobile Alby Go app for accessing it, plus a browser extension for Nostr signing, and that browser extension supports using both the Alby Hub wallet and some other lightning wallets. I did get it all to work together, and it's a pleasant experience. <img src="/img/hello-nostr/nos2x.png" alt="nos2x" /> However, to keep things a bit more simple and single-task focused, I'll recommend trying out the <a href="https://github.com/fiatjaf/nos2x">nos2x extension</a> first. It's not pretty, but handles the signer piece very well. Install the extension, enter the <code>nsec</code> you got from YokiHonne, click save, and you're good to go. If you go to another Nostr client, like <a href="https://nostrudel.ninja">noStrudel</a>, you should be able to "sign in with extension." You may also notice that there's any entry area for "preferred relays." We'll discuss relays next. Feel free to come back to this step and add those relays. (And, after you've done that, you can also use a <a href="https://snowcait.github.io/nostr-json-generator">nostr.json generator</a> to help you self-host your NIP-05 address if you're so inclined.) Final note: once you've done the initial setup, it's not clear how to get back to the nos2x settings page. Right-click the extension, click manage extension, and then choose "extension options." At least those were the steps in <a href="https://brave.com/">Brave</a>; it may be slightly different in other browsers. <h3 id="relays">Relays</h3> This has been my biggest pain point with Nostr so far. Everything you do with Nostr needs to be sent to relays or received from relays. You want to have a consistent and relatively broad set of relays to make sure your view of the world is consistent. If you don't, you'll likely end up with things like mismatched profiles across relays, messages that seem to disappear, and more. This was probably my biggest stumbling block when first working with Nostr. There seem to be three common ways to set the list of relays: <ul> <li>Manually entering the relays in the client's settings.</li> <li>Getting the list of relays from the signer extension (covered by <a href="https://github.com/nostr-protocol/nips/blob/master/07.md">NIP-07</a>).</li> <li>Getting the list of relays from your NIP-05 file.</li> </ul> Unfortunately, it looks like most clients don't support the latter two methods. So unfortunately, any time you start using a new client, you should check the relay list and manually sync it up with a list of relays you maintain. You can look at <a href="https://www.snoyman.com/.well-known/nostr.json">my nostr.json file</a> for my own list of relays. One relay in particular I was recommended to use is <code>wss://hist.nostr.land</code>. This relay will keep track of your profile and follow list updates. As I mentioned, it's easy to accidentally partially-override your profile information through inconsistent relay lists, and apparently lots of new users (myself included) end up doing this. If you go to <a href="https://hist.nostr.land/">hist.nostr.land</a> you can sign in, find your historical updates, and restore old versions. <h3 id="mobile">Mobile</h3> You're now set up on your web experience. For mobile, download any mobile app and set it up similarly to what I described for web. The major difference will be that you'll likely be entering your <code>nsec</code> directly into the mobile app. I've used both <a href="https://damus.io/">Damus</a> and <a href="https://yakihonne.com/yakihonne-mobile-app">YakiHonne</a>. I had better luck with YakiHonne for getting zaps working reliably, but that may simply be because I'd tried Damus before I'd gotten set up with coinos before. I'll probably try out Damus some more soon. Note on Damus: I had trouble initially with sending Zaps on Damus, but apparently that's because of <a href="https://njump.me/nevent1qgsr9cvzwc652r4m83d86ykplrnm9dg5gwdvzzn8ameanlvut35wy3gqyp6m8dphmzjfpynmvzsr88mkkulmq2npm92eewr0h5p92jzujn0lvz79rnt">Apple rules</a>. You can enable Zaps by visiting this site on your device: <a href="https://zap.army/">https://zap.army/</a>. Thanks <a href="https://njump.me/jb55.com">William Cassarin</a> for the guidance and the great app. <h2 id="introductions">Introductions</h2> You should now be fully set up to start interacting on Nostr! As a final step, I recommend you start off by sending an introduction note. This is a short note telling the world a bit about yourself, with the <code>#introductions</code> hashtag. For comparison, here's <a href="https://yakihonne.com/notes/nevent1qgsw8wj7rgrwz8yxqqmtt30x3qqjhc4ggas2hsrx4s62px2ntepnxegqyrnqq2ljscepjmr3spkrwcequhqkl7vtgps292e8uxac9qr5dkljul7t767">my introduction note</a> (or a <a href="nostr:nevent1qgsw8wj7rgrwz8yxqqmtt30x3qqjhc4ggas2hsrx4s62px2ntepnxegqyrnqq2ljscepjmr3spkrwcequhqkl7vtgps292e8uxac9qr5dkljul7t767">Nostr-native URL</a>). And in addition, feel free to <code>@</code> me in a note as well, I'd love to meet other people on Nostr who joined up after reading this post. My identifier is <code>michael@snoyman.com</code>. You can also check out my <a href="https://njump.me/michael@snoyman.com">profile page on njump</a>, which is a great service to become acquainted with. And now that you're on Nostr, let me share my experiences with the platform so far. <h2 id="my-experience">My experience</h2> I'm definitely planning to continue using Nostr. The community has a different feel to my other major social media hub, X, which isn't surprising. There's a lot more discussion of Bitcoin and economics, which I love. There's also, at least subjectively, more of a sense of having fun versus X. I described it as joyscrolling versus doomscrolling. Nostr is a free speech haven. It's quite literally impossible to fully silence someone. People can theoretically be banned from specific relays, but a banned user could always just use other relays are continue to create new keys. There's no KYC process to stop them. I've only found one truly vile account so far, and it was easy enough to just ignore. This fits very well with my own personal ethos. I'd rather people have a public forum to express any opinion, especially the opinions I most strongly disagree with, including calls to violence. I believe the world is better for allowing these opinions to be shared, debated, and (hopefully) exposed as vapid. The process of zapping is surprisingly engaging. The amount of money people send around isn't much. The most common zap amount is 21 satoshis, which at the current price of Bitcoin is just about 2 US cents. Unless you become massively popular, you're not going to retire on zaps. But it's far more meaningful to receive a zap than a like; it means someone parted with something of actual value because you made their day just a little bit better. And likewise, zapping someone else has the same feeling. It's also possible to tip providers of clients and other tools, which is a fundamental shift from the advertiser-driven web of today. I'd love to hear from others about their own experiences! Please reach out with your own findings. Hopefully we'll all be able to push social media into a more open, healthy, and fun direction. Steelmanning Tariffs Mon, 25 Nov 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/11/steelmanning-tariffs/ https://www.snoyman.com/blog/2024/11/steelmanning-tariffs/ UPDATE A few days after posting this article, I saw a <a href="https://x.com/RallyWithGalli/status/1861354664773722140">video on X</a> that gives (IMO) a better argument in favor of tariffs than I came up with here. If you're interested in the topic, I'd recommend giving it a watch, it's only about 11 minutes. I’m a believer in the idea of free markets. The principle is simple: with less regulation and freedom of individuals to engage in trade and their own price discovery, we’ll end up with optimal price points and maximizing production, making everyone’s life better. Tariffs fly in the face of this by introducing unnecessary and artificial barriers to trade. A classic example is sugar. The US has an import tariff on sugar, which makes it artificially more expensive to use sugar in products. Corn syrup, on the other hand, is produced from domestically grown corn and faces no such penalty. It is therefore artificially cheaper than sugar, and ends up being used in products. The results: <ul> <li>More corn is produced than is actually needed, preventing agriculture from focusing on higher value production for society</li> <li>Consumers receive inferior products made out of corn syrup instead of sugar</li> <li>Consumers pay more for these goods than they would without the tariff</li> <li>Sugar producers outside the US make smaller profits</li> </ul> There’s an even worse aspect to tariffs though: they can kick off devastating battles between countries. Tariffs are essentially economic warfare, harming citizens of another country to help your own citizens. Once one country starts tariffs, it can snowball into a crippling domino effect that impedes all global trade. Donald Trump has said he’s going to use tariffs, because we’re “losing on trade” by having a trade deficit. But that statement is bonkers. A trade deficit means a country receives more goods than it sends out. In other words, citizens do better with a trade deficit. Based on all this, it seems pretty straightforward that economists would oppose Trump’s tariff plan, and would balk at his explanations. In this post, I want to steelman the position: give the best argument in favor of Trump’s plan that I can think of. (I won’t bother trying to defend the “losing on trade” comment though, it’s factually wrong, but seems like a good rallying cry for a policy from a political standpoint.) To set the stage, we’re going to start by discussing two ideas, and then bringing them together: negative externalities and granularity of competition. <h1 id="negative-externalities">Negative externalities</h1> In economics, a negative externality is when some activity has a negative impact on others. This essentially transfers some of the costs of an activity to others, while keeping all the benefits for the actor. A great example is pollution. A factory can either spend a million dollars a year cleaning up its waste, or it could dump its pollution into the lake. The business gets no benefit from an unpolluted lake, but normal people will lose the ability to use the lake. The business has externalized a cost onto society. Programmers may already be familiar with another term for this concept: the tragedy of the commons. One method to address externalities like this is through regulation: make it illegal for companies to pollute in the lake. But economics offers another approach to this as well: assign ownership rights on the lake. An owner can decide whether or not to allow pollution based on any criteria they want. Being a rational actor (one of the largest assumptions in economics, often violated), the new owner is incentivized to set up an auction for usage rights to the lake. The polluting business can compete against companies offering leisure activities on the lake. Then the free market can determine if the million dollars of cost savings is more valuable than the benefits people can take from a clean lake. Instead of assigning the property rights to the lake to a private entity, the government can engage in this activity through open auction as well. This results in increased tax revenue, which will decrease the overall tax burden for everyone, flipping the tragedy of the commons into a benefit for all. You may not like this solution, because you believe that the free market can’t properly price in the true value of a non-polluted lake, or because you don’t believe people will act rationally, or any other reason. That’s not terribly relevant for this discussion. The point is the definition of a negative externality, and the fact that the government can extract money from economic actors while increasing public good. <h1 id="granularity-of-competition">Granularity of competition</h1> All of economics is a story of competition over scarce goods. Generally, we talk about the competition of individuals or private entities. In other words: people and businesses competing with each other. Note that the competition isn’t between buyers and sellers, as is often believed. Instead, buyers are competing with other buyers, pushing prices up, while sellers are competing with other sellers, pushing prices down. One of the underlying assumptions of capitalism is that there’s a fair playing field. All actors should be treated equally. In practice, this fails fairly often. For example, in crony capitalism, select businesses receive special handouts from the government. Monopolies are another arguable example, where a company can leverage its overwhelming market share in one industry to subsidize the destruction of competitors in another industry. As mentioned above, tariffs hurt people by creating an uneven playing field between individuals. But viewed at the national level, tariffs are a method of competition between different governments. In other words, leveraging tariffs may end up hurting competition at the granular level, but might end up serving the interests of a government policy which is at odds with “make all goods cheaper through more competition.” <h2 id="protecting-workers">Protecting workers</h2> In this sense, tariffs are not at all unique. Differences in regulations between countries, laws about fair labor practices, environment impact, local tax structures, and manipulation of currency exchange rates are all part of the competition between different nations. As a simple example, suppose country A has strict labor laws, demanding safe working conditions and demanding health coverage for all workers, while country B does not. Country B will be able to outcompete country A for new businesses, because it’s relatively cheaper to produce in country B. Tariffs in such a scenario can be a method for country A to make production in country B less attractive. If country A imposes a 20% tariff on country B imports due to human rights violations, it is in essence making production in country A more competitive again. Without this kind of change, countries seeking to attract investment and new businesses may be incentivized to pass laws that hurt their citizens just to bring down production costs. <h2 id="national-security">National security</h2> Another topic is national security. Let’s take countries C and D, who are not on the best of terms. Both countries are stocking up on weapons in case war breaks out. Both countries locally source weapons production, ordering lots of tanks from domestic producers. Firstly, why domestic? Because it would be crazy to put your national defense in the hands of a potential enemy! But suppose there’s completely free international trade, with no embargos and no tariffs. Country C is a major steel exporter, obviously an import input to tank production. Country C can engage in some economic warfare of its own against country D: <ul> <li>Subsidize local production of steel</li> <li>Cheaper steel exports prevent domestic production of steel from ramping up in country D <ul> <li>Under normal circumstances, this is great! It’s what we would term specialization, allowing citizens in country D to focus on what they’re relatively better at.</li> <li>In the long run, the strategy would be unprofitable for country C’s government, and it will eventually either go bankrupt or have to halt the policy.</li> <li>However, since we’re discussing national security…</li> </ul> </li> <li>When war breaks out, country C can simply block all steel exports</li> <li>Country D will face a supply chain crisis. Its domestic steel production is low, it hasn’t invested in better tools and technology for steel production, and it will have to quickly and inefficiently produce enough steel to keep up with the war effort.</li> </ul> <h1 id="tying-it-together">Tying it together</h1> The best argument I can pull together from these points is that tariffs can be used to place the United States in a stronger position for future competition with geopolitical competitors. Instead of allowing poor labor practices in other countries to drag down the standard of living for Americans, tariffs will artificially inflate the price of incoming goods. Instead of rewarding other countries that pollute, tariffs will extract a penalty from those countries, properly allocating the costs of the negative externalities to those polluting nations. And finally, by incentivizing an increase in domestic production across the board, the US is set up for more autonomy in the case of escalation (through either embargos or full-on warfare), protecting its interests. It’s the best argument I can make. Others can probably critique my points as well as provide better justifications than I have. I’d love to see those in the comments. The real question is: do the arguments in favor of these tariffs justify the costs many of us anticipate seeing: higher product costs, trade wars, decreased international trade, and isolationism of the US. Personally, I don’t think the arguments add up. I’m mostly on the side of the mainstream for once. I wouldn’t have proposed tariffs in the current world environment, I wouldn’t vote in favor of them, and I wouldn’t speak out in support of them. And especially given that the proposal seems to be a flat tariff on most countries (with a higher tariff on China), it doesn’t seem to address the “negative externalities” bit at all, which would do better from targeted tariffs attempting to incentivize specific changes (like carbon emission reduction or improvement to labor laws). Which leaves me with only one final argument in favor of the tariffs: they could be a great bluff. I think many people in the world believe that Trump would be willing to pull the trigger and enact such a policy. That gives him a really great negotiating position for whatever trade deals and other foreign policy objectives he has. <h1 id="my-prediction">My prediction</h1> I’m a software developer who watches politics and studies economics. My prediction on topics like this isn’t particularly informed, and is likely to be completely wrong. But I may as well put my thoughts in writing so everyone can remind me how wrong I was in the future! I think Trump will continue to talk about tariffs in his new administration. He’ll spend more time discussing them with the press and foreign leaders than with the Republicans in Congress. There will always be a convenient reason why the tariffs aren’t proposed. And eventually, Trump will get some concessions from other nations, and will eventually “fail” to pass tariffs. The media will have a field day with it, and Trump will accuse someone somewhere of being the reason why “the greatest tax plan of all time” failed. And maybe it’s my prediction just because I’m hoping it’s what becomes reality. Other outcomes I can foresee are much less rosy. My Path to Bitcoin Mon, 18 Nov 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/11/my-path-to-bitcoin/ https://www.snoyman.com/blog/2024/11/my-path-to-bitcoin/ Since <a href="https://www.snoyman.com/blog/2024/10/personal-update-upcoming-blogging/">deciding to write more blog posts again</a>, I’ve drafted and thrown away a few different versions of this blog post. Originally, I was going to try to explain how Bitcoin works, or motivate to others why they should care about it. But the reality is that there is already much better material out there than I can produce. So instead, I’ve decided to make this much more personal: my own journey, why I ultimately changed my opinion and decided to embrace Bitcoin, and then answer some questions and comments I’ve received from others. If you really do want to learn the best arguments in favor of Bitcoin (as opposed to “price goes up” style arguments), here is my list of top resources. I’ll try to keep this list up to date over time: <ul> <li><a href="https://medium.com/@vijayboyapati/the-bullish-case-for-bitcoin-6ecc8bdecc1">The Bullish Case for Bitcoin</a> (article)</li> <li><a href="https://saifedean.com/tbs">The Bitcoin Standard</a> (long form book)</li> </ul> OK, without further ado, my path to Bitcoin! <h1 id="before-bitcoin">Before Bitcoin</h1> My worldview is highly impactful on this discussion, so I need to get the cliffnotes of my outlook clarified. I come from a financially conservative background. I grew up believing that dollars were king, fixed income savings were good, and the stock market was little more than a casino. I ran most of my financial investments like that for most of my life, either investing in property (i.e., the house I own, not extra investment properties) or keeping cash, US treasuries, and Certificates of Deposit (CDs). When I went truly crazy, I would occasionally invest in the S&P 500 index, the least gambly of gambling. (I’ve <a href="https://www.snoyman.com/blog/2024/10/buying-bitcoin-or-selling-dollars/">commented on that previously</a>.) I studied actuarial science in school, and worked as an actuary for a few years before moving to Israel. Being an actuary definitely put me in the world of finance, but on a much more theoretical as opposed to practical side. As a small example, I learned all the financial mathematics involved in pricing of options, but never learned any real-life strategy for trading options. And that suited me just fine: options are even more risky than normal stock market gambling! What that theoretical background gave me was two relevant bodies of knowledge: statistics for risk analysis, and economics. Overall I loved my economics courses. The simple concepts of scarcity and competition fit so perfectly with human psychology and perfectly describe so much of the world around us. (Side note: I don’t just mean in financial matters, I strongly recommend everyone learns the basics of economics to better understand the world at large.) One minor note about studying economics. My courses were roughly broken down into micro and macro economics. Microeconomics clicked with me from day 1. Things like “price caps lead to shortages” are so simple to understand and evidently true that I can explain them to my 7 year old without a problem. It was macroeconomics that I couldn’t understand. Why did all the rules of microeconomics–intervention prevents free markets from discovering equilibrium–go out the door when you went to the macro level? Why was it that the government needed to intervene by printing money and spurring the market into action by increasing spending? I was just a math student larping as an economist, not a true economist, so I incorrectly assumed that this was all just beyond my feeble understanding. And I happily lived my life for about 15 years as an actuary/programmer who enjoyed some economics and lived a fiscally conservative lifestyle. <h1 id="first-hints-of-bitcoin">First hints of Bitcoin</h1> I heard about Bitcoin relatively early in its existence. My wife and I even discussed buying some when it was still under a dollar. To our chagrin, we didn’t. This fit in nicely with my “avoid casinos” approach. Bitcoin was simply a get-rich-quick scam, a Ponzi scheme, fake internet money, you name it. To be completely fair, I didn’t fully come to those conclusions at the time, but it was more-or-less what I thought. What’s amazing is that I had just lived through the Great Financial Crisis of 2008. I was painfully aware of what a financial disaster we had. I had already graduated at the time, but I was still close to many friends from UCLA, many in economics and financial majors. I remember discussing how ridiculous “too big to fail” was. The phrase I learned much later, Privatizing Profits and Socializing Losses, was exactly how we all felt, and I knew it was setting up incorrect incentive structures. But I didn’t spend enough time to recognize that there was any connection between that disaster and this new Bitcoin fake money scam. I spent close to 7 years having virtually nothing to do with blockchain and cryptocurrency. At some point around 2016, through my work in the Haskell space, I ended up consulting on a few blockchain projects, including building blockchains for others. I also ended up on a lot of sales calls as a sales engineer. I won’t call out any specific projects. But suffice it to say that I walked away completely believing that all of “crypto” was a scam. And to quote a phrase from Jewish literature, אוי לרשע אוי לשכנו (woe to the evil one, woe to his neighbor). I must have opened up a Binance account at some point in this, and probably bought some crypto to get a feel for how it all worked. But I had no interest in being part of the space. Blockchain seemed like a cool technology on its own early in its hype cycle. But cryptocurrency itself wasn’t for me. <h1 id="covid-19-money-printer-goes-brrrr">COVID-19, money printer goes brrrr</h1> When COVID-19 began kicking off, many of us saw the huge amount of money printing, paired with forced lack of productivity due to various COVID restrictions. The combination meant that, simultaneously, true productivity in the economy slowed down (meaning: less goods) and more money was chasing those goods. A lot more money. Money printer goes brrr. <img src="/static/images/money-printer.gif" alt="Money printer goes brr" /> As much as I’d buried my head in the sand during the 2008 financial crisis, things were different this time. <ol> <li>I was older (and hopefully more mature), more financially aware, and had more money at risk.</li> <li>In 2008, I was a young, newly married man dealing with his first job and learning how to raise my first child. I didn’t have a lot of free thought cycles around. While I wasn’t exactly lounging around in 2020, I had more time available to think about the problem.</li> <li>Thanks to developments at work, I ended up working in the cryptocurrency space again.</li> </ol> Putting these things together, I paid attention, did some level of research, and decided inflation terrified me. I could easily see the value of all my savings go down dramatically. After some soul searching, I decided it was time to start abandoning my highly-risk-averse savings strategy, and begin embracing a more diversified investment strategy. This meant dividing among: <ul> <li>Cash, CDs, and treasury bonds. Higher interest rates certainly made this pretty attractive to myself at the time.</li> <li>Buying into the S&P 500 index. While I still had my original financial outlook of the stock market being little more than a gamble, I also understood risk and empirical data, and investing in the index would–on average and assuming markets continued operating the same way as the past–continue to go up. Hopefully somewhere in line with the officially reported inflation numbers, if you believe those.</li> <li>And the scariest and riskiest of all: crypto.</li> </ul> I want to be clear that this was not a purchase of me saying “I’m a total believer in crypto, this thing is going to skyrocket.” It was simple risk hedging. I was afraid of the fiat currency system, i.e. dollars, losing a huge amount of their value. That made stock investments far less risky in comparison. But my faith in the stock market wasn’t exactly stalwart. With all the financial system changes coming as a result of COVID-19 restrictions and money printing, I was looking for any kind of safety net. I invested in crypto like I would invest in stocks: I chose a basket of the top performers at the time, diversified my money into them, and hoped for the best. <h2 id="terra-collapse">Terra collapse</h2> This is a side note almost not worth including, but some people may be comforted by this part of the story. The work I’d been doing in crypto at the time had been on the Terra blockchain. For those who aren’t aware, Terra had a systemic collapse in May 2022 due to the depegging of the TerraUSD (a.k.a. UST) stablecoin. Or, as the jokes correctly put it, not-so-stablecoin. I lost a significant amount of money on that. With my fiscally conservative background, this was essentially a worst-case-scenario making all of my greatest fears of risky investment come true. At this point, however, I had learned enough about the crypto boom/bust cycles. Miriam (my wife) and I spent a lot of time discussing, and decided we’d ride out the bear market, not simply run away screaming. The point of the inclusion of this here: I basically went through the worst possible financial outcome I could imagine. And it wasn’t nearly as bad as I thought it would be. I lost money. That’s never fun. But the true moral of the story I’m telling is that everything in the financial world is a massive jumble of different risks these days. There isn’t a single safe haven, at least not like gold was in the 1800s. The important part for everyone: don’t fall into the sunk cost fallacy! If you’ve taken losses on an investment, try to stay calm, look at it rationally, and make the best decision you possibly can with current knowledge and no emotional input. <h1 id="the-bitcoin-maxi-path">The Bitcoin maxi path</h1> I’m almost embarrassed by this next sentence. Despite working in the crypto space off-and-on for about 8 years now, and despite spending 3 years full-time working on crypto and Decentralized Finance products, I only recently understood the connection between the beginning of this story (the Great Financial Crisis of 2008) and Bitcoin. You see, I shouldn’t have stuck my head in the sand back then. Had I had more time and more curiosity, I could have discovered a few truths. Firstly, Bitcoin is directly targeted at addressing the unsound system that led to the Great Recession. Secondly, Bitcoin and crypto–at least in general–are very different beasts. My guess is that, like me, most people are more afraid of Bitcoin because they have it mentally associated with the rest of the crypto world and all the fun casino-like-games it contains. And finally, I discovered that I knew both more and less about economics than I thought I did. You’ll see people in the Bitcoin world talk about “doing your 100 hours” before you understand Bitcoin. I think I’ve only completed that in the past few months. It’s from watching a lot of random YouTube videos, chatting with people on X and Reddit, reading blog posts, and most powerfully and most recently: reading The Bitcoin Standard. I haven’t even finished it yet, I’m looking forward to the rest. But already, it’s snapped a lot of my economics understanding into focus. In particular, it’s given me a much better understanding of the concept of money than I ever received in my university economics courses. (Or I’m simply listening better this time around.) It’s also helped me understand why macroeconomics never clicked with me. Anyone who’s read the book will know that it’s not exactly gentle in its treatment of Keynesian and Monetarist economic theories. Getting a clear breakdown of the different schools of thought, how they compare to Austrian economics, and the author’s very opinionated views on them, has been one of the most intellectually stimulating things I’ve done since learning monads and the borrow checker. Side note: I wish more texts included the authors’ direct and unapologetic opinions like this. If someone has a similarly direct take-down of the arguments in The Bitcoin Standard, I would love to read it, please pass it along. Putting that all together: a monetary system which allows for no inflation and grants no party central control is far more powerful than I originally understood. My opinion evolved somewhat slowly from “magical internet money” to “potentially good risk hedge in a balanced portfolio.” It went really quickly from that to “oh, I get it, this is the hardest money that exists, it will store value for the foreseeable future.” I no longer look at my investment in Bitcoin as a risk. I’ve switched worldviews completely. Every other asset I hold is the risk. I can be hurt significantly by this of course. If Bitcoin has another bear market and I need to buy groceries, I’ll be taking a huge loss on the Bitcoin I need to liquidate. (I discuss how I address this in my <a href="https://www.snoyman.com/blog/2024/10/buying-bitcoin-or-selling-dollars/">buying Bitcoin or selling dollars post</a>.) <h1 id="aren-t-i-scared">Aren’t I scared?</h1> Yes. I think we’re living in some of the scariest financial times of our lives. But my viewpoint now is that everything is risky, there’s no escaping it. There isn’t a safe-haven in dollars and potentially big gains in other assets. Everything is on a precipice right now. And my honest belief is that, for the long haul, Bitcoin is the least risky of all potentially stores of value. Am I right? We’ll know in 20 years. <h1 id="my-recommendation-to-others">My recommendation to others</h1> This is my personal journey. This story shouldn’t convince anyone to do anything with their money. I haven’t presented any true arguments in favor of Bitcoin here, just some comments and references to larger ideas. If you take anything away from this, I hope it’s this: there’s some guy out there who’s really scared of risky investments, has at least some formal training in economics and finance, wanted nothing to do with Bitcoin, and then decided he was completely wrong and embraced it. I hope that motivates those of you who are opposed to Bitcoin to do a bit more research. Challenge the ideas you read. Challenge the ideas you already hold. Ask questions. Get in debates. Treat this seriously. Because whichever way you decide, for or against Bitcoin, will likely have a major impact on the rest of your life. <h1 id="random-q-a">Random Q&A</h1> I received some questions previously on my <a href="https://www.snoyman.com/blog/2024/10/bitcoin-vs-gold/">Bitcoin vs gold</a> blog post, and haven’t had a chance to answer them in another post. Instead of a dedicated post for that, this seems like a good time to address that. <blockquote> Bitcoin was originally marketed as anonymous. Nowadays we consider it pseudonymous at best. Do you believe this is an important feature for money? Do you believe it is actually *desirable*? </blockquote> Yes, I do. The economy works best by all people being completely free to make whatever financial decisions they believe are best for themselves. Having non-anonymous financial transactions will add friction to that system. Each time I make a purchase, I’ll wonder if others will judge me unfavorably for it. Having the Bitcoin chain work as it does today with all transactions being publicly visible is great for transparency. Publicly held companies publishing their wallet addresses is great too. But there needs to be some room for truly anonymous interactions. And I believe we’ll see that space expand over time as Bitcoin moves from “great speculative asset” to “money.” The Lightning Network already does a pretty great job at this. <blockquote> If anonymity is important, why not some more modern cryptocurrency? </blockquote> Because it isn’t needed. Bitcoin has one thing few other cryptocurrencies have, and one thing none of them have: <ol> <li>Bitcoin is a scarce resource. If you look at the tokenomics of most other cryptocurrencies, they are massively complex and usually inflationary in some way. None of those can ever act as a true store of value over time.</li> <li>Bitcoin is first. That’s obviously not entirely true; there are plenty of other attempts at digital money that predate it, arguably the modern dollar is also a “digital asset,” etc. But for this new class of “algorithmically scarce, decentralized, digital money,” Bitcoin is the first on the scene. As a result, it has major network effects, and will be essentially impossible to dethrone until someone comes up with a fundamentally better approach. No one has so far.</li> </ol> <blockquote> How would/should society be organized in a world where a lot of modern taxation would likely(?) be very hard due to completely unobservable cash flows? Currently I think a lot of this relies on cash being local, and the sources and sinks of it being relatively traceable. </blockquote> Exposing my politics a bit more, I’m totally in favor of a society based far less on taxing the populace. That said, I don’t think Bitcoin will fundamentally change this. People who have wanted to evade taxes have found ways in the past, and the government has always found ways to increase its surveillance apparatus to keep up with them. It’s an arms race that will continue. If we get to a point where all money is Bitcoin and everyone transacts daily in Lightning wallets, I have no doubt that the local supermarket will fully comply with all reporting rules to the government on purchases, property purchases will require justification of where your funds came from, and other such things that will ensure the majority of financial transactions stay in the legal, taxable world. <blockquote> Modern economic theory indeed often aims at a ~2% annual inflation (not more, not less), as an incentive to keep investing in ways that presumably benefit the society instead of sitting on money. Deflation is considered dangerous for the same reason. It seems to me, perhaps naively, that zero inflation would make investment a zero sum game, which seemingly removes a lot of the incentives. What do you think of this? </blockquote> I’m still coming to terms on inflation vs deflation. Until recently, I had naively assumed that everyone believed deflation was awesome because all of society benefits from getting more stuff, and inflation was the penalty for letting the government print money. Apparently that is far from the modern well-accepted outlook. I may be making a mistake in my interpretation, but based on what I’ve read in The Bitcoin Standard, here’s an answer that I hope is accurate. Whenever you have money, you can do one of two things with it: use it for immediate consumption, or defer its usage to later. The real interest rate (nominal interest - inflation rate) gives an indication of how much you’ll be rewarded for deferring usage of your money till later. With deflation (i.e., negative inflation), you end up with a high real interest. This means “if you hold off on consumption you’ll get even more stuff in the future.” This incentivizes a low time preference: I don’t value immediate consumption very much versus later consumption. Coming back to your question: the “sitting on money” idea comes directly from Keynesian economics, where the focus is on spending, consumerism, and short term money flows. An Austrian approach is completely different. Sitting on money means that I allow productive capability today to be put into capital goods, things which will increase production in the future, thus making more stuff available in the future at lower prices, thus further fueling deflation. Note that another way of looking at interest rates is the cost of capital. It’s a price just like any other price in the economy. If you have the government set the price of apples, you’ll either have shortages or surpluses. So what happens to capital when the central bank gets to set the price of capital by controlling interest rates? There’s a lot more to this topic, and I’m pretty fresh to it, so I’ll call it there. I’d definitely recommend The Bitcoin Standard for more on the topic. Buying Bitcoin or selling dollars? Sun, 13 Oct 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/10/buying-bitcoin-or-selling-dollars/ https://www.snoyman.com/blog/2024/10/buying-bitcoin-or-selling-dollars/ The act of trading means that both sides give up one good for something they value more. When I go to the supermarket, I’m giving the supermarket dollars (or euros, or shekels) in exchange for food. I value the food more than the money. The supermarket values the money more than the food. Everyone walks away happy with a successful trade. But we don’t normally talk about going to the supermarket and trading for food. We generally say we’re buying food. Buying is simply a trade where you give money. Similarly, the supermarket is selling food, where selling is a trade where you receive money. Now let’s say I’m going on a trip to Europe and need some cash. I have US dollars, and I need Euros. Both of those are money. So am I buying Euros, or am I selling dollars? We generally use the term exchange in that case. You may notice, all of these acts are really identical to trading, it’s just a matter of nomenclature. The terms we use represent how we view the assets at play. Which brings me to the point of this post: buying Bitcoin. <h1 id="buying-bitcoin">Buying Bitcoin</h1> I come from a fairly traditional, if very conservative, financial background. I was raised in a house that believes putting money in the stock market is essentially reckless gambling, and then my university education included a lot of economics and finance courses, which gave me a broader view. I’m still fairly conservative in my investments, and was very crypto-wary for a while. I care more about long-term security, not short term gains. Investing in Bitcoin seemed foolish. At some point in the past 5 years, I changed my opinion on this slightly. I began to see Bitcoin as a prudent hedge against risks in other asset classes. From that world view, I began to buy Bitcoin. Dollars are the real money, and Bitcoin is the risk asset that I’m speculatively investing in and hoping for a return. Meaning: I ultimately intend to sell that Bitcoin for more dollars than I spent to get it. Much like I would treat stock. As those 5 years have trudged along, I’ve become more confident in Bitcoin, and simultaneously less confident in fiat currency. Like many others, the rampant money printing and high levels of inflation have me worried about staking my future on fiat currencies. Investing in stocks would be the traditional inflation protection hedge, but I’m coming around more to a Bitcoin maxi-style belief that fixed total supply is the most important feature of anything we use for long term storage. All of this led to the question that kicked off this blog post: <h1 id="am-i-buying-bitcoin-or-selling-dollars">Am I buying Bitcoin, or selling dollars?</h1> Remember that buying and selling are both the same thing as trading. There’s no difference between the act of buying Bitcoin with dollars, or selling dollars for Bitcoin. It’s just a difference in what you view as the real money. Most people in the world would consider the dollar to be the real money in the equation. I have some background in Talmudic study, and one of the common phrases we use in studying Talmud is <a href="https://en.wikipedia.org/wiki/Nafka_minnah">מאי נפקא מינה</a>, pronounced “my nafka meena,” or “what is the practical difference between these two?” There’s no point having a pure debate about terminology. Is there any practical difference in how I relate to the world whether I’m buying Bitcoin or selling dollars? And after some thinking, I realized what it is. <h1 id="entering-a-trade">Entering a trade</h1> Forget Bitcoin entirely. I wake up one morning, and go to my brokerage account. I’ve got $50,000 in cash sitting there, waiting to be invested. Let’s say that represents half of my net worth. I start looking at the charts, doing some research, and I strongly believe that a company’s stock is undervalued and is about to go up significantly. What do I do? Well, most likely I’m going to buy some of that stock. Am I going to put in the entire $50k? Probably not, I’m very risk averse, and I like to hedge my risks. Investing half my net worth in one stock, based on the price on one day, is too dangerous for my taste. (Others invest differently, and there’s certainly value in being more aggressive, just sharing my own views.) Buying the stock is called entering a trade. Similarly, if two weeks later, that stock has gone up 20%, I’m sitting on a bunch of profits, and I hear some news that may negatively impact that stock, I may decide to sell the stock or exit the trade. But let’s change things a bit. Let’s say I’m not that confident the stock will go up at the beginning of this story. Am I going to buy in? Probably not. For those familiar, this may sound like status-quo bias: the bias to stick to whatever we’re currently doing barring additional information. But I think there’s something more subtle going on here as well. Let’s say I did buy the stock, it did go up 20%, and now I’m nervous it’s about to tank. I’m not confident at all, just a hunch. Depending on the strength of that hunch, I’m going to sell. My overall confidence threshold for buying in is much higher than selling out. And the reason for this is simple: risk. Overall, I view the dollar as the stable asset, and the stock as the risk asset. By selling early, I risk losing out on further potential gains. Economically, that’s equivalent to losing money when you view things as opportunity costs. But the risks of losing value, to someone fiscally conservative and risk averse like me, outweigh the potential gains. <h1 id="the-price-of-bitcoin-the-price-of-the-dollar">The price of Bitcoin, the price of the dollar</h1> Alright, back to Bitcoin. My practical difference absolutely applies here. Let’s say (for simplicity of numbers) that the current price of Bitcoin is $50,000. I’m sitting on 1 BTC and $50,000 cash. I have three options: <ol> <li>Trade my dollars to get more Bitcoin</li> <li>Do nothing</li> <li>Trade my Bitcoin to get more dollars</li> </ol> But there’s a problem with this framing. By quoting the price of Bitcoin in dollars, I’ve already injected a bias into the analysis. I’m implicitly viewing dollars as money, and Bitcoin as the risk asset. We can equivalently view the current price as 0.00002 BTC per dollar. And, since playing with numbers like that is painful, we can talk about uBTC (micro-BTC, or a millionth of a Bitcoin) instead, and say the current price of a dollar is 20 uBTC. (Side note: personally, I think the unit ksat, or thousand satoshis, or a one-hundred-thousandth of a Bitcoin, is a good unit for discussing prices, but I’ve never seen anyone else use it, so I’ll stick to uBTC.) Anyway, let’s come back to the case in point. We have two different world views, and three different cases for each world view: <ol> <li>Bitcoin is priced at $50,000 <ol> <li>I think the price will go up, so I should buy Bitcoin</li> <li>I think the price will go down, so I should sell Bitcoin</li> <li>I don’t know the direction the price will take</li> </ol> </li> <li>The dollar is priced at 20 uBTC <ol> <li>I think the price will go up, so I should buy dollars</li> <li>I think the price will go down, so I should sell dollars</li> <li>I don’t know the direction the price will take</li> </ol> </li> </ol> You may notice that cases 1a and 2b are equivalent: the price of Bitcoin going up is the same as the price of the dollar going down. The same with cases 1b and 2a. And more obviously, cases 1c and 2c are the same: in both cases, I don’t know where I think the prices will go. <h1 id="risk-averse-defaults">Risk-averse defaults</h1> This is where risk aversion should come into play. Put simply: what is the least risky asset to hold? In our stock case, it was clearly the dollar. And if you asked me 5 years ago, I absolutely would have said holding onto dollars is far less risky than holding onto Bitcoin. And this is where I think I begin down the path of the Bitcoin Maxi. I started seriously considering Bitcoin as an investment due to rampant money printing and inflation. It started as a simple hedge, throwing in yet another risky asset with others. But I’ve realized my viewpoint on the matter is changing over time. As many others have put it before me, fiat currency goes to 0 over time as more printing occurs. It’s not a question of “will the dollar lose value,” there’s a guarantee that the dollar will lose value over time, unless monetary policy is significantly altered. And there’s no reason to believe it will be. I understand and completely respect the viewpoint that Bitcoin is imaginary internet money with no inherent value. I personally disagree, at least today, though it was my dominant view 5 years ago. Assuming sufficient people continue to believe Bitcoin is more than a ponzi scheme and is instead a scarce asset providing a true store of value with no long-term devaluation through money printing, Bitcoin will continue to go up, not down, over time. In other words, as I stared at this argument, I came to a clear conclusion: my worldview is that the risk-averse asset to hold these days is Bitcoin, not dollars. But this bothered me even more. <h1 id="tzvei-dinim">Tzvei dinim</h1> OK, I’m a full-on Bitcoin Maxi. I should liquidate all my existing investments and convert them to Bitcoin. Every time I get a paycheck, I should convert the full value into Bitcoin. I’ll never touch a dollar again. Right? Well, no. Using my framework above, there’s no reason to avoid investing in stocks, fiat, metals, or anything else that you believe will go up in value. It’s a question of the safe default. But even so, I haven’t gone ahead with taking every dollar I have and buying up Bitcoin with it. I still leave my paycheck in dollars and only buy up some Bitcoin when I have a sufficient balance. This felt like cognitive dissonance to me, and I needed to figure out why I was behaving inconsistently! And fortunately another Talmudic study philosophy came into play. <a href="https://en.wikipedia.org/wiki/Brisker_method">Tzvei dinim</a> is a Yiddish phrase that means “two laws,” and it indicates that two cases have different outcomes because the situations are different. And for me, the answer is that money (and investments in general) have two radically different purposes: <ol> <li>Short-term usage for living. This includes paying rent, buying groceries, and a rainy day fund. Depending on how risk-averse you are, that rainy day fund could be to cover 1 month of expenses while you look for another job, or years of savings in case your entire industry is destroyed by AI.</li> <li>Long-term store of value.</li> </ol> What’s great about this breakdown is that I’ve lived my entire adult life knowing it, and I bet many of you have too! We’ve all heard phrases around the stock market like “don’t invest more than you can afford to lose.” The point of this is that the price of stocks can fluctuate significantly, and you don’t want to be forced to sell at a low point to cover grocery bills. Keep enough funds for short-term usage, and only invest what you have for long-term store of value. This significantly assuaged my feelings of cognitive dissonance. And it allows me to answer my question above pretty well about whether I’d buy/sell Bitcoin or dollars: <ul> <li>Keep enough money in dollars to cover expected expenses in the near term</li> <li>Invest money speculatively based on strong beliefs about where asset prices are heading</li> <li>And beyond that, keep the rest of the money in Bitcoin, not dollars. Over time, the dollar will decrease in value, and Bitcoin will increase in value. I’d rather have my default exposure be to the asset that’s going up, not down.</li> </ul> <h1 id="conclusion">Conclusion</h1> Thanks for going on this journey with me. The point here isn’t to evangelize anything in particular. As I said, I understand and respect the hesitancy to buy into a new asset class. I’ve been working in the blockchain field for close to a decade now, and I've only recently come around to this way of thinking. And it’s entirely possible that I’m completely wrong, Bitcoin will turn out to be a complete scam asset and go to 0, and I’ll bemoan my stupid view of the world I’m sharing in this post. If so, please don’t point and laugh when you see me. My point in this post is primarily to solidify my own viewpoint for myself. And since I do that best by writing up a blog post as a form of <a href="https://en.wikipedia.org/wiki/Rubber_duck_debugging">rubber ducking</a>, I decided to do so. As I’m writing this, I still don’t know if I’ll even publish it! And if I did end up publishing this and you’re reading it now, here’s my secondary point: helping others gain a new perspective. I think it’s always valuable to challenge your assumptions. If you’ve been looking at “cryptobros” as crazy investors hoping to make 10,000% returns on a GIF, I’m hoping this post gives you a different perspective of viewing Bitcoin as a better store of value than traditional assets. Feel free to disagree with me! But I hope you at least give the ideas some time to percolate. <h1 id="appendix-1-risk-aversion">Appendix 1: risk aversion</h1> I’m sure plenty of people will read this and think I’m lying to myself. I claim to be risk averse, but I’m gambling on a new and relatively untested asset class. Putting money into the stock market is a far more well-established mechanism for providing inflation protection, and investing in indices like the S&P 500 provides good hedging of risks. So why would I buy into Bitcoin instead? This is another contradiction that can be resolved by the tzvei dinim approach. You can evaluate risk either based on empirical data (meaning past performance), or by looking at fundamental principles and mechanisms. The stock market is demonstrably a good performer by empirical standards, delivering reliable returns. Some people might try to claim that Bitcoin has the same track record: it’s gone up in value stupendously during its existence. I don’t actually believe that at all. Yes, Bitcoin has appreciated a lot, but the short time frame means I don’t really care about its track record, definitely not as much as I do the stock market’s. Instead, when I look at Bitcoin, I’m more persuaded by the mechanism, which simply put is fixed supply. There will never be more than 21,000,000 BTC. If there was a hard fork of the network that started increasing that supply, I’d lose faith in Bitcoin completely and likely sell out of it. I’m a believer in the mechanism of a deflationary currency. And there is no better asset I can think of for fixed supply than Bitcoin. (Though gold comes very close… if people are interested, I may follow up later with a Bitcoin vs gold blog post.) By contrast, the underlying mechanism for the stock market going up over time is less clear. Some of that is inherent by dint of money printing: more money being printed will flow into stocks, because that’s where people park their newly printed money. My main concern with the stock market is that most people aren’t following any fundamental <a href="https://corporatefinanceinstitute.com/resources/valuation/stock-valuation/">valuation technique</a>, and are instead treating it as a Ponzi scheme. Said differently, I want to analyze the value of a stock based on my expected future revenues from dividends (or some equivalent objective measure). Instead, stocks are mostly traded based on how much you think someone else will value it in the future. My views on the stock market are somewhat extreme and colored by the extremely risk-averse viewpoint I received growing up. Others will likely disagree completely that the stock market is pure speculation. And they’d also probably laugh at the idea that Bitcoin has more inherent value than the way stocks are traded. It’s still my stance. <h1 id="appendix-2-cryptobros">Appendix 2: cryptobros</h1> I mentioned cryptobros above, and made a reference to NFTs. Before getting deeper into the space, I had–like many others–believed “Bitcoin” and “crypto” were more or less synonymous. True believers in Bitcoin, and I’m slowly coming to admit that I’m one of them, disagree completely. Bitcoin is a new monetary system based on fixed supply, no centralized control, censorship resistance, and pseudo-anonymity. Crypto in many of its forms is little more than get-rich-quick schemes. I don’t believe that’s true across the board for all crypto assets. I do believe that was true for much of the NFT hype and for meme coins. Ethereum to me has intrinsic value, because the ability to have your financial transaction logged on the most secure blockchain in the world is valuable in its own right. So just keep in mind, crypto does not necessarily mean the same thing as Bitcoin. <h1 id="appendix-3-drei-dinim">Appendix 3: drei dinim</h1> I mentioned “tzvei dinim” above, meaning “two laws.” I want to introduce a drei dinim, meaning three laws. (And if I mistransliterated Yiddish, my apologies, I don’t actually speak the language at all.) I described short-term vs long-term above. In reality, I think there are really three different ideas at play: <ol> <li>Short-term money holding for expenses</li> <li>Long-term store of value</li> <li>Speculative investments because you think an asset will outperform the safe asset</li> </ol> My view is that, due to the inflationary nature of fiat currency, groups (2) and (3) have been unfairly lumped together for most people. Want to store value for the next 30 years? Don’t keep it in dollars, you better buy stocks! I don’t like that view of the world. The skill of choosing what to invest in is not universal, it requires work, and many people lose their shirts trying to buy into the right stock. (Side note, that’s why many people recommended investing in indices, specifically to avoid those kinds of concerns.) I want a world where there’s an asset that retains its value over time, regardless of inflation and money printing. Bitcoin is designed to do just that. But if you really think a stock is going to go up 75% in a week, category (3) still gives plenty of room to do speculative investment, without violating the rest of the cognitive framework I’ve described. <h1 id="appendix-4-why-specifically-bitcoin">Appendix 4: why specifically Bitcoin?</h1> The arguments I’ve given above just argue for a currency that has a fixed maximum supply. You could argue decentralization is a necessary feature too, since it’s what guarantees the supply won’t be changed. So why is Bitcoin in particular the thing we go with? To go to the absurd, why doesn’t each person on the planet make their own coin (e.g. my Snoycoin) and use that as currency? This isn’t just a theoretical idea. One of the strongest (IMO) arguments against Bitcoin is exactly this: anyone can create a new one, so the fixed supply is really just a lie. There’s an infinite supply of made-up internet money, even if each individual token may have a fixed supply. To me, this comes down to the question of competition, as does virtually everything else in economics. Bitcoin is a direct competitor to the dollar. The dollar has strengths over Bitcoin: institutional support, clear regulatory framework, requirement for US citizens to pay taxes with dollars, requirement of US business to accept dollars for payment. Bitcoin is competing with the strengths I’ve described above. I believe that, ultimately, the advantages of Bitcoin will continue to erode the strength of the dollar. That’s why I’m buying into it, literally and figuratively. However, new coins don’t have the same competitive power. If I make Snoycoin, it’s worse in every way imaginable to Bitcoin. It simply won’t take off. And it shouldn’t, despite all the money I’d make from it. There is an argument to be made that Ethereum is a better currency than Bitcoin, since it allows for execution of more complex smart contracts. I personally don’t see Ethereum (or other digital assets) dethroning Bitcoin as king of the hill any time soon. Bitcoin vs Gold Tue, 08 Oct 2024 00:00:00 +0000 https://www.snoyman.com/blog/2024/10/bitcoin-vs-gold/ https://www.snoyman.com/blog/2024/10/bitcoin-vs-gold/ I just watched an interview between Peter Schiff and Jack Mallers about gold versus Bitcoin. I’d recommend it to anyone interested in either asset, or more generally to those interested in the theories of economics and money in general: <iframe width="560" height="315" src="https://www.youtube.com/embed/MSlEQA1BoOE?si=KR9n_kqKMGnuLJdt" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" referrerpolicy="strict-origin-when-cross-origin" allowfullscreen></iframe> <a href="https://youtu.be/MSlEQA1BoOE?si=Wy3JYaZYBQ0Vb_Ol">Peter Schiff & Jack Mallers Debate Bitcoin Vs. Gold, Collapse Of Dollar</a> Peter represented the pro-gold side of this debate, with Jack taking the pro-Bitcoin side. <h2 id="the-premise">The premise</h2> The debate itself takes a lot of premises for granted. In particular, both sides view rampant money printing and an out-of-control money supply as being unsound foundations for an economy. While I personally agree with this completely, it’s not at all a universally held belief. Many economists in fact recommend having low levels of inflation in the economy, due to the dangers of deflation. The debate never touched on justifying these premises since both sides completely agreed. If you’re a viewer (or reader of this post) who hasn’t completely bought into this way of thinking, the discussion may be somewhat confusing. I may decide to write a post on this topic on its own in the future. (And if that’s something you’re interested in, let me know, I’m more likely to write it up if people want to see it.) In any event, the upshot of this is that both parties agree that current fiat currency, without any backing by a hard asset, is a mistake. They both seemed to agree that the major breakdown in fiat currency was the complete removal of the gold standard in 1971, though they have crucial differences of opinion about why that happened which I’ll cover below. The question is: what asset is better for fixing this problem, gold or Bitcoin? <h2 id="which-asset-is-money">Which asset is money?</h2> Overall, I thought both sides represented their arguments well, and I’ll reference some of them below. There was only one piece of the debate that I think completely missed the point, but it’s crucial enough that I’ll start my analysis there. Peter and Jack discussed, at length, whether gold or Bitcoin counted as money. This of course begs the question: what’s your definition of money? Using the <a href="https://en.wikipedia.org/wiki/Money">Wikipedia definition</a>: <blockquote> Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. </blockquote> That first bit, “generally accepted as payment,” got a lot of attention in the debate. There were discussions for a while about whether you could walk into a store and buy things with either gold or Bitcoin, and moreso, if goods were priced in gold or Bitcoin. Both sides tried to make arguments around this claiming their side was money. My disagreement on this part of the debate is that, in my opinion fairly obviously, neither asset is generally used as “money” today, at least by this definition of “used to buy goods in stores.” Instead, both assets are more generally used as investments, speculation, store of value, or any other long-term holding term you’d want to use. So by the focus of the debate, both assets fail at being money. But that’s the wrong question! It’s not about whether or not these assets are money. Instead, I would want to ask two separate questions: <ul> <li>In an ideal world, which asset works better as money?</li> <li>Which asset has the best path forward to becoming money?</li> </ul> In other words, I don’t think the question is about today. The question is instead about which future (gold vs Bitcoin) is better, and which future is more attainable. And I think the debate provided a lot of food for thought to analyze these two questions. <h2 id="intrinsic-value-of-gold">Intrinsic value of gold</h2> Peter pointed out that gold has intrinsic value. Gold is desired for jewelry, manufacturing, technology, and other purposes, in addition to being sought as a store of value. Jack was fairly dismissive of this, since money doesn’t need to have any intrinsic value. It only needs to be widely accepted. (Case in point: when I receive a stimulus check from the US government as a wire transfer into my bank account, there is 0 “intrinsic value” to that digital update of my bank account, but I can use it as money regardless.) While I agree with Jack that intrinsic value is not a necessary property of money, I have to give the win to Peter on this. While intrinsic value isn’t necessary, it’s certainly a perk, and makes it less likely that the asset will stop being accepted for payment of some kind in the future. And we can see this with how the price of gold behaved after the end of the gold standard: it started to rise significantly. <h2 id="intrinsic-value-of-bitcoin">Intrinsic value of Bitcoin</h2> On the other hand, in the debate, neither side ever really applied the term “intrinsic value” to Bitcoin. Instead, Jack made some other and very strong arguments for advantages of Bitcoin over gold, namely: <ul> <li>Built in network for settlement. By contrast, gold can easily be exchanged physically with others locally, but cannot be settled in a global economy without the assistance of institutions or governments.</li> <li>Completely fixed supply at 21 million BTC. By contrast, gold has an uncapped supply, which can be expanded through (expensive) mining.</li> <li>Ability to self custody funds.</li> <li>Censorship resistance.</li> </ul> Are these “intrinsic value?” Probably not, but it’s really an issue of semantics. The reality is that Bitcoin does provide these features, and gold mostly doesn’t. You could argue that physical gold is completely censorship-resistant because you can transfer gold to others without external approval. But that only works locally, not for non-local payments, which will be an important point in a bit. My point in this section is that there are absolutely features of Bitcoin which gold does not have, and which might make it a better money. Is that more important than the “intrinsic value” argument for gold? That’s a highly subjective question. But my subjectivity says that yes, these make Bitcoin a better vehicle to act as money than gold. <h2 id="volatility">Volatility</h2> Another topic that was brought up was the volatility of Bitcoin. How can you use an asset as money when its price swings regularly between $55,000 and $65,000? (And that’s just in the past month!) The debate had some back-and-forth about the difference between volatility and risk. That was another semantics issue that didn’t matter much to me. The fact is, the price of Bitcoin in terms of dollars does fluctuate significantly. Does that make Bitcoin a worse money? I’d say no, it doesn’t. It might be a barrier to the adoption of Bitcoin as money, since people will be hesitant to accept payment in an asset who’s “real world” value changes so dramatically. But remember, I’m rephrasing the question not to “is Bitcoin money,” but rather to “is Bitcoin a good future money?” In that world, the fact that the exchange rate with another currency changes significantly is not a barrier to usage as money. But perhaps more directly, it seems likely to me that Bitcoin being adopted as money would cause a significant reduction in volatility. Instead of exchanging Bitcoin for dollars each time you want to buy something, people would be living in a new Bitcoin-denominated economy. Fluctuations in exchange rate don’t preclude that. And yes, this argument equally applies to gold being a good money. The difference is that the volatility of gold is significantly lower than Bitcoin. <h2 id="what-s-the-better-money">What’s the better money?</h2> I see both sides of the argument as valid and strong. For me, gold has the advantages of intrinsic value, existing adoption, and likely the longest track record in human history as being used as money. Those are some solid advantages. By contrast, Bitcoin has a fully fixed supply and a network that allows for fast global settlement and self custody. We could get into the other details discussed, but in my opinion none of the other points really address which is the better money overall. For me, Bitcoin has a serious advantage here. Lack of centralized control is vital. And it becomes more so when we analyze the second question. <h2 id="which-money-can-win">Which money can win?</h2> I’ll say directly: I don’t see a world in which gold ends up being money again. I don’t think fiat currencies can go back to a gold standard without some insane debasement of the currency. And there’s no reason to believe the will exists among governments, politicians, and institutions to turn off the money printer. All the conditions that led to the removal of the gold standard in 1971 still apply today. This is where Jack’s arguments really hit home for me. At a local level, maybe I could convince people in my town to accept gold coins. But my local supermarket is part of a multinational conglomerate. They won’t be sending shipments of gold coins across the world to pay vendors. The globalization of the economy is a large part of why the world moved towards the dollar–while still backed by the gold standard–as its reserve currency in the 20th century. It was easy to move around a representation of gold. The removal of the gold standard was simply the next logical step, allowing the US to create money out of thin air. By contrast, Bitcoin is ready to compete now. There are systems already which allow you to connect credit cards and other “normal” payment methods to your Bitcoin balance. Services (such as Jack’s Strike) allow you to easily convert your paycheck to Bitcoin. Bitcoin may not win at displacing the dollar, but there’s a clear plan from the pro-Bitcoin side towards making it easy to use Bitcoin while still keeping your funds in a non-inflationary asset. Market forces and the self-interest of many can simply continue to drive adoption. (This is another topic I’ve been thinking about writing a post on, so if the details here seem flimsy, ask for details and I might write that one up too.) To be fair, gold could do much of this as well. Peter mentioned tokenization of gold multiple times in the debate. And I don’t disagree with him overall. However, in practice, Jack’s point stands that this relies on institutions and governments, and there’s no reason to believe another kind of debasement couldn’t happen again in the future. And empirically, we haven’t seen a move back towards the gold standard in the past fifty years, while the Bitcoin revolution has momentum. In other words, if you asked me to place a bet on which asset will end up being used as money at scale, my bet is on Bitcoin. <h2 id="fallible-humans">Fallible humans</h2> I used my own analysis, not Peter and Jack’s, at the end of the previous section. Let me go back to the actual arguments they made. We know that human beings made a decision to move the US away from the gold standard and towards our current fiat system. Both Peter and Jack believe this was a mistake. But their takes on this are slightly–but importantly–different: <ul> <li>Peter points to “fallible humans” as the problem. Politicians got greedy, wanted more money to print to buy votes, wage wars, buy off lobbyists, or whatever else they wanted to do. It’s not an inherent flaw in gold, it’s an inherent flaw in people.</li> <li>Jack agrees with the fallible humans part (I think). But he lays the blame directly on gold itself. Because gold necessitates centralization with institutions and governments to allow for global trade, a gold-based money will always put too much power in the hands of those fallible people. Bitcoin, by contrast, has no centralization of power at all.</li> </ul> Jack’s argument overall wins the day for me. <h2 id="takeaways">Takeaways</h2> The debate was great, and I’d recommend others take the time to watch it. My conclusion above is clear, I think Bitcoin has the edge for becoming a new money system. But that’s just theoretical. What should individuals do about all this? At the moment, neither Bitcoin nor gold is used as money, at least not widely. Right now, for the most part, by buying these assets, you’re hoping for a long-term store of value which defeats inflation. Jack made some good data-driven points that, in fact, gold has not achieved that since the end of the gold standard. Gold has averaged a 7% annual appreciation, while average consumer prices have risen 8% annually. Stocks have gone up even more at 11%. (I haven’t checked these numbers myself, just repeating them.) Bitcoin, by contrast, has massively outperformed everything over its lifetime. It’s gone from less than a dollar to over $60,000 in the span of 13 years. That’s an unbelievably good asset to invest in… if it continues. And that’s where Peter’s points land solidly too. Judging Bitcoin based on only 13 years of data, and trying to extrapolate to the future from that, is naive at best. While in theory Bitcoin is poised to be a great money, and at least a powerful store of value, it’s entirely possible that it will fail. Gold, by contrast, has little risk of losing a significant portion of its value over time, barring significant technological changes making it cheaper to increase the supply (e.g., space mining, alchemy, new terrestrial deposits). One of Peter’s last comments was to recommend Bitcoiners “take profits” on their Bitcoin and hedge with some gold investments. I put “take profits” in scare quotes, since it implicitly identifies Bitcoin as nothing more than a speculative asset, presuming Peter’s world view that Bitcoin is not money. Nonetheless, I think this is wise advice. <h2 id="what-i-m-doing">What I’m doing</h2> I wrote up another post that I haven’t published yet talking about my current stance on Bitcoin, I’ll likely publish it in the near future. I’ll get into my overall approach there. For this specific debate, I can say that I put money into both Bitcoin and gold, and intend to continue doing so. I have no intention of selling my holdings in either in the foreseeable future. And I always keep enough fiat around to cover unexpected events (home repair, job loss, etc).

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