On today’s episode, NLW is joined by Mike Peterson, director of Bitcoin Beach. Bitcoin Beach is a community project in El Salvador that has spent the last two years helping individuals and companies integrate bitcoin into their daily lives and long-term habits. President Nayib Bukele cited Bitcoin Beach in inspiring El Salvador’s bitcoin legal tender law.
In this interview, NLW and Mike discuss:
How he came to reside in El Salvador
How the bitcoin community project started
What drove community adoption at the beginning
How remittances and COVID-19 solidified the value of BTC to the community
How bitcoin has changed how people think about investing
How international bitcoiners such as Miles Suter and Jack Mallers got to know the project
Where the project stands today (complete with 22 different community initiatives)
What’s going on guys? It is Friday, June 11. And today, I am so excited to bring you a conversation with Bitcoin Beach’s Michael Peterson. If you were on Nick Carter’s Twitter space on Tuesday night, where El Salvador’s President Nayib Bukele popped in to answer questions for about an hour, you heard Mike Peterson talk. You see, Bitcoin Beach is a project in El Salvador that has been running for a couple of years now. And they set out to show that for one, bitcoin could be used day-to-day as well as it could be used as a long term investing and saving technology; and two, that bitcoin wasn’t just for rich people: in fact, the poorest of the poor could often find even more empowerment in it than the rich that we normally associated with.
Their website states: “we believe that if a local economy is created with the support of bitcoin, new opportunities will open up for the community members. The project Bitcoin Beach is creating a sustainable bitcoin economic ecosystem on the coast of El Salvador, where the majority of people do not have access to bank accounts, and the local businesses could never qualify for merchant accounts needed to accept credit cards.”
From the early days, bitcoin promised to allow us to bank the unbanked and return power from governments and financial institutions to the individual. However, until recently, this promise has remained elusive. Bitcoin Beach is a movement to make sure that the true potential of bitcoin is realized, and that those who have been excluded from the banking system are the primary beneficiaries.
On that call on Nick Carter’s Twitter spaces, President Bukele went out of his way to say that it was the inspiration of Bitcoin Beach, showing that bitcoin wasn’t just for rich people, that it could improve the outcomes of individuals and a community as a whole that inspired them to start looking into bitcoin in the first place. So with that, I’m incredibly excited to bring you this interview about how Bitcoin Beach came to be, what it’s doing, where it’s headed, and how you can get involved.
NLW
I’m so excited for this conversation. Obviously, it comes at a really awesome time. But you and I’ve been talking about doing this for a while. So perfect, that it’s all coming together right now.
Michael Peterson
Well, I’m glad the president of El Salvador could finally get me on your show.
NLW
He did it as a favor. Nah man, I mean, obviously, anyone who’s listening to The Breakdown frequently has context around, you know, a little bit of context around what’s been going on. But I think that one of the things that’s so important is that this didn’t come out of nowhere. And a lot of the place that it came out of is the work that you guys have been doing down in El Zonte and in El Salvador just more broadly, for the last couple years.
But let’s go back even before that, like, how did you end up getting involved in this? How did you end up spending time down there in the first place? I mean, what is your story that got you there?
Michael Peterson
Originally, I wound up in El Salvador on a surf trip. I mean, they have wonderful waves and warm water. And so, about 17 years ago, I went down and just really fell in love with the country. I’ve traveled all my life, I’ve probably been to like 45 different countries. And it was the first time that I wanted to buy a house. And so I called my wife and said, “Hey, we’re buying a house in El Salvador.” And three weeks later, we flew back down, and we bought a house in El Salvador. So that’s kind of how it started. And initially, we just spent a few months of the year there. But about seven years ago, we made the decision to basically split our time between there and the US and kind of be more full time there.
Michael Peterson
And that was kind of where it was all born. Once we were there, we saw you know, the needs, we got to know a lot of our neighbors and kind of better understand their experience. And so we became involved in some different educational campaigns, economic development initiatives. And you know, that was kind of parallel to me going down the deep rabbit hole with bitcoin. And then two years ago, in conjunction with a donation to the project we were doing that was done in bitcoin that wanted to see it be used in real ways. We basically bitcoin-ized everything we were doing. And it’s just kind of blown up from there.
NLW
I think a lot of things that are interesting about this is one, having a long duration and relationship and experience with the place that you’re interacting with before you decide to do a bunch of programs. That’s something that I think is a little bit too rare in terms of a lot of the kind of global development, global philanthropy work that happens. So it’s really interesting that you came there because of the thing that you loved, which was surfing, fell in love with the place, got to know the community, and then it kind of grew organically from there.
And it feels like a lot of the the bitcoin side of the whole project was also similarly organic, where it sort of started to present itself, you were exploring it, and it just kind of made sense to keep going deeper and deeper. I mean, what were the early pieces of that like? Let’s talk about the point where you guys have a bitcoin donation that comes in, probably trying to figure out how to actually use that, what was that kind of actual turning point, I guess, and what were some of the first steps to bring bitcoin into the work that you were doing?
Michael Peterson
I definitely don’t think we would have been able to do any of it had we not had that kind of long term relationship already with the community and hadn’t built that trust. Even the guys that I worked with on a daily basis, when I told them, “hey, we’re gonna start using this magic internet money, and we’re gonna give stores to accept it, we’re gonna get people to start taking their salaries in it,” they just kind of looked at me like, “okay, Mike.” So that was kind of the initial response.
But we do a lot of work with the youth, especially in gang prevention. And a lot of these youth didn’t have other job opportunities. So they were actually kind of forced to take bitcoin because they didn’t have any other job options. And so we were paying them in bitcoin, to clean trash out of the rivers, or clean the beach. And once they started using it, I mean, it only took a couple days for it to really click for them that, wow, this is so much better than using dollars. I can send it to my friend across town, I don’t have to worry about putting it in the bank, it’s always with me, because I always have my phone.
And so it really started with the youth. And then from there, you know, once the youth had it, and were looking to spend it, we got our first store on board, we kind of cajoled them into accepting it. And they did it kind of reluctantly. But you know, at this point, more than half their sales are in bitcoin. So it’s kind of in that same pathway with everybody. And initially, they’re a little bit hesitant, they’re a little bit skeptical, which is healthy, people should be skeptical, because we don’t want them falling for, you know, scams or other scam coins. And so it was good for them to be skeptical.
But once they start interacting with bitcoin, and once they start doing their own research and realizing there’s this global market, there are people all around the world that want bitcoin that are willing to exchange it for value. There’s doctors and lawyers from the capital city of San Salvador that started driving down to El Zonte to buy bitcoin from people from the youth that they realize, “Wow, we really have something here.”
NLW
So I guess let’s talk about like, what the financial profile of folks in these communities, was or is going into this, what percentage of them are actually incorporated in the traditional financial system have bank accounts, how much of it is just totally cash based before that, and then maybe just as another dimension of this, what is mobile or internet penetration, kind of to correspond with that?
Michael Peterson
I’d say those who do pretty much everything in cash is probably 90%, maybe an additional 10% have bank accounts, but they don’t really use them, but probably 80%, there’s no bank accounts at all. But the internet and mobile penetration is, you know, probably the reverse of that, there’s probably only 20% of the population that doesn’t have at least somebody in their family that has a smartphone that’s capable of having a mobile wallet on it.
NLW
And so when you guys were kind of introduced to it, how much was the initial value proposition that was exciting to people, about the comparative convenience of the digital money ecosystem versus kind of a cash ecosystem, versus an interest in the bitcoin assets? Specifically, I think, you know, part of the motivation for the question, too, is, I think people are now really trying to understand how this community that you guys have down there can model other places. Obviously, we’re about to see a much wider experiment across El Salvador, but I’m interested in what clicked for people that got them excited.
Michael Peterson
Initially, it was just the convenience. I mean, most of them weren’t that interested in bitcoin, if they would have had the option to have the same convenience in dollars, they probably would have chosen that initially. But over time, they started to realize that their bitcoin assets were appreciating and that they would much rather have their money being held in bitcoin rather than holding in dollars. I think that’s important for people to realize, they don’t have to understand everything about bitcoin, they don’t have to sell them on all the aspects of it, what you really need to do is get them using it, once they start using it, they have that “aha” moment.
And then once they start holding it for longer periods, and seeing how much they put in versus what they can buy with it a year later, like, that’s how they flip switches. And that’s how they actually start wanting to put the effort into learning how to hold their own keys, how to custody it safely, the different options for non-custodial versus custodial wallets, and all those things. First, you get them using it, then they’ll do the work.
NLW
It sounds to me almost like there’s sort of a twin value proposition that clicked for people. The first part of it being, “this is just easier and more convenient to use, it’s time saving,” all the things that come with any form of digital money in some ways. But then there’s the second piece around actually empowering people to feel like investors and like they have some agency and an ability to design their future a little bit more. I mean, is that a fair characterization?
Michael Peterson
Oh, 100%. Because these are people who have never had access to financial markets, they’ve never even thought about having access to financial markets. So when they got money, they would just spend it right away. Because why not, it was just going to go down in value over time. So even saving seemed kind of pointless.
And we’ve seen that I mean, it literally changes people’s outlook on life. And always not just about money, like once they start thinking, hey, if I don’t spend this today, it’s gonna buy me more next year, there’s corollaries with education with everything else. Now, they’re starting to think, “Well, yeah, I have to forego, you know, earning a wage this year to go on to university, but longer term that’s going to be in my best interest.”
And so we’re seeing a whole generation that’s just looking at life very differently. And I mean, honestly, you see hope on their face. I mean, I know it sounds kind of corny, but for a lot of these people, this is the first time they felt like hope that they can build a future in El Salvador that they’re not going to have to follow the path of their parents to sneak into the US illegally and work in some dead end job. They can build a business based on bitcoin, they can work for an American company being paid in bitcoin, but still be able to live in the country they were born in. And so it really opens up the world to them.
NLW
I think that one of the things that I’ve long felt is that our sense of the possible is shaped by what we see around us. And one of the things that we do extremely poorly, even in the US, is actually treat people of all kinds of economic classes like they should or care, they have the capacity to think about investing in their future in a meaningful way.
And some of that’s the language that we use, some of that’s financial media, which I think is kind of designed to be exclusionary and in-group, but I think one of the things that makes bitcoin pretty unique in that is just the divisibility of it, that you can see your stats going up, even if it’s a tiny amount. It feels different than, you know, owning a single stock and a single stock might be out of reach in most contexts, you know?
Michael Peterson
Yeah, they’ve literally never had that opportunity. I mean, before investing used to mean like, they would buy a bunch of cement blocks, because they knew cement blocks went up over time. So if they had money and needed to build something in the future, they might as well buy those blocks now, so they at least don’t lose value. But for them to be able to buy something that’s going to go up in value over time? Like that really just shifts everything in their mind.
And it’s, I mean, these are just super intelligent, hardworking people that haven’t had these opportunities before. That’s the thing I always want to make sure people realize when they hear about the Bitcoin Beach project, or they hear about what’s going on in El Salvador. It’s not that, you know, I, myself, or anybody else brought Bitcoin down to El Salvador. The Salvadorans proved the use case for Bitcoin. They’re the ones that proved that Bitcoin can be used in the ways that we always talk about that we’ve never seen before, they figured out a way to make it work. And they’re literally upending the world’s financial system. So I just want to make sure that people realize, these are these young people that a lot of people, you know, look at as having no future, but they are literally changing the future.
NLW
Yeah, I’d love to hear more about who actually works on this down there, like who’s kind of driving it and what are the different aspects of the project? And then I guess simultaneously, maybe more or first just to kind of a follow up question from from the last question is, have you guys gone through a sustained period of Bitcoin going down? And, you know, have you seen that change people’s perceptions or, you know, how did you help people kind of think through how to think about that experience?
Michael Peterson
Yes, we have a team of probably about 15 people. Most of them are, you know, ages kind of, 16 to 30, is the majority of them. Jorge Valenzuela is the community leader that heads it all up. He’s one of those guys that, I don’t think he ever needs to sleep. He just runs circles around me. And he has this huge heart and he’s always looking for ways to improve the community.
And so, right now we have 22 different programs that are going on: everything from the lifeguard program, where for the whole region, he launched this professional lifeguard program where we have 62 lifeguards being paid in Bitcoin. We have English classes where people are learning English, but the teachers are being paid in Bitcoin. We have a trash collection service for the whole community where the people collecting the trash are being paid in Bitcoin. So it’s not people being given Bitcoin, like they are earning Bitcoin and they prefer to earn Bitcoin and they’re spending Bitcoin at the local stores and it’s Bitcoin that’s kind of sustaining the local economy.
NLW
So it’s, I mean, it sounds like more than anything, it’s a kind of pretty end-to-end community-driven, bottoms-up economic development initiative that happens to have this new asset that serves to kind of facilitate the ease with which the the kind of resources flow through the system and also creates kind of a different mentality and incentive around it.
Michael Peterson
No, 100% it is, this is very bottom-up and it’s funny because when bitcoiners, you know, when when expat bitcoiners come down, and they see people wearing bitcoin t-shirts or bitcoin hats, they kind of freak out because they’re so used to being you know, ultra secretive, and you don’t want anybody to know you’re in Bitcoin, because they’re gonna rob you because they’re gonna think you’re rich.
I tell them no, in El Zonte if you have Bitcoin stuff, they think you’re poor, because it’s mostly the poor that are using Bitcoin and it’s the wealthy who are kind of the last to adopt it. And so it really is the money of the people. And I think that’s what makes our project different than anything I’ve seen anywhere else in the world is it really is, you know, the people that only have a second grade education, the people that are living in shacks with dirt floors that are interacting and doing most of their life in bitcoin.
NLW
You started in 2019. What was the sequence, I guess where did different things come online? What was first, what was next? And where did you guys start to connect with some of these international bitcoiners obviously, Jack Mallers came down Miles Suter from Square came down, how did that connection happen?
Michael Peterson
Initially, when we started we started with the youth. We have a real focus on the youth because in El Salvador, there’s a huge gang issue. So a lot of the youth from age 10 to 14 are recruited into the local gangs. And so we wanted to provide a more positive pathway forward. And so that was our initial focus, we were paying these young men and women to pick up trash to do other kinds of community benefit jobs, and they’re being paid in bitcoin. And so initially, it was this really kind of small thing.
And we wanted to go down to the LABITCONF, the Latin American Bitcoin conference, which in 2019 was in Uruguay. And so I took Jorge Valenzuela, who I mentioned earlier, and I took another gentleman, who was from another town that we have a project in, a gentleman named Juan. We took them to this conference.
It was the first time they’ve been out of El Salvador, first time they’ve been on a plane, and definitely the first time they’ve been around a bunch of crazy bitcoiners because we were in this big convention hall, and I think Max Kaiser was the first person that came on. And, you know, he did his whole shtick and was totally obscene. And they’re looking at me, like, “What in the world have you brought us to?” Fortunately, it got a little more in depth after that.
And, you know, they came out of there dyed in the wool, you know, bitcoiners. I was able to bring them back with that experience, with that view that this is an international thing. And then they started kind of spreading that in the community.
And also, during that time, I ran into Peter McCormick. And I told him, “Hey, we have this little project, we’d love to have you come check it out.” And you know, I was thinking, like, in a year, maybe he’d come by. And so he looked at me and said, “Okay, well, I’m going to Bolivia tomorrow, so I can be there on Thursday.” I was like, oh, okay, yeah, let’s do this.
So, Peter McCormick actually was the first one that kind of put us on the map. We did a podcast with him and he put some videos out, I think he quadrupled my Twitter account with one video that he sent out from my, you know, 30 Twitter followers at that time to 120. He put us on the map there.
And then, you know, it was growing, we were instigating some new programs and kind of methodical way. And then COVID hit. And when COVID hit it was a combination of there was a huge needs. But also it gave us an opportunity to use Bitcoin in a way that otherwise would have been irresponsible.
I’m really a big believer that when you do any type of development work, or any type of aid work, you have to be very careful to not cause more damage than good. You have to be very careful not to distort the local economy, you have to be careful not to dentists, dissent, disincentivize work. And so generally, for us to just give bitcoin out is something that we, you know, we try to avoid. But during the COVID lockdown, nobody was allowed to leave their house, they weren’t allowed to work. And nobody had any money for food. And so we kind of switched at that time.
We started doing basically like a universal basic income, to all of the town, there were like 500 families, and we were sending out about $40 worth of Bitcoin every three weeks. And that kept the stores in business because there was money flowing through, they could buy their basic food goods, it gave them enough to buy at least the basics of food. And they got all of them using Bitcoin and seeing how easy it was to use, not just in person, but they could also you know, send the payment to the store, and then have the store come deliver food to them, which was a huge issue during the COVID lockdown. So that supercharged it.
And then coming out of that we had Miles Suter was kind of the second person that came down. And he was originally only planning to come down for a couple weeks and he stayed for six months. And obviously huge help somebody with his experience, his network. And then Jack Mallers kind of followed, and to bring Strike with him, and just, I mean, what a huge asset to have that system for people to be able to send remittances, because remittances is kind of the Holy Grail. It’s the thing where bitcoin really shines.
And so, you know, that’s kind of all these things have been happening. And at the same time, our local programs have just been turbocharged also. So now we have 22 different community programs where we’re doing all this. And we also have probably a few 100 people that are actually getting their salaries in bitcoin now. Some of them that work with us, but a lot of them that work for other companies, both local and international.
NLW
How much has this been able to be funded from that kind of initial donation? Or have you guys had more donations? I mean, it sounds like, obviously a ton of work that’s gone into this.
Michael Peterson
Yeah, a lot of that was from that initial donation, but then there’s been a lot of subsequent donations from a lot of different bitcoiners you know, something as small as you know, a couple of 100, a couple 1000 SATs to you know, people sending large chunks of a bitcoin. And so it’s enabled us to sustain it.
But what our goal is, is to really make it so that we’re not having to raise funds. We want individuals earning bitcoin, we want people that have jobs with bitcoin companies. So the fact that now we have a number of people that are employed by Strike, Strike’s actually paying rent on the office building of ours that they’re using. And so that’s, you know, helping fund the project.
And then we have a number of other companies that have started hiring people from El Zonte to help them with everything from ongoing or onboarding new customers, to doing marketing. We even have another bitcoin related company that’s having an architect student down here helping them put together construction bids.
NLW
Super interesting. I mean, this obviously gets into I think some of the stuff that’s happening now. So maybe just to kind of transition into that, let’s actually talk about your perception of Salvadoran politics and how that’s changed. You’ve obviously been going down there for a seriously long amount of time. You saw the transition to the New Ideas party. Holding aside everything that we know now in bitcoin, like, how would you describe the shift in political sentiment over the last, I don’t know, 5, 10, years?
Michael Peterson
Well, the shift really happened a few years ago with the New Ideas Party and the rise of Nayib Bukele. Before that, everybody was very cynical about politics, you know, kind of go back and forth between the right and the left there, you know, reminds me a lot of the US system. So I was really surprised when Nayib Bukele rose to power because, you know, we’ve seen third party candidates in the US, but we’ve never seen them be able to get that type of traction.
And he really shook things up. I mean, he didn’t, he didn’t do any of the traditional debates. He didn’t use the traditional media, he used Facebook, he used TikTok, and I was shocked to see how much support he was able to rally through that. So you know, in El Salvador, I’m very apolitical. I’m not a Salvadoran, and I stay out of the politics. But I just as an observer, I have never seen people more excited. And I’ve never seen people more hopeful of the future.
And so I in general, I’ve liked most of the stuff that he’s been doing. You know, there’s always a concern when somebody has that much popular appeal that it could go sideways. But so far, I’ve been very pleased. And even over the last six months, we’ve met with his Minister of the Economy, Minister of Tourism, the Minister of Education, and I’ve never met with bureaucrats before that were so forward looking, and who really wanted to help the people, and weren’t just kind of stuck in the past.
So I know he’s getting a lot of flack from certain quarters. But so far, from what I’ve seen, it’s been all positive. And especially in light of the history in El Salvador, where the three previous presidents blatantly robbed the country. One died under house arrest, one’s in jail now and one, you know, fled the Nicaragua for asylum. So that tells you, you know, the bar wasn’t very high. But he definitely has the people behind him.
NLW
So do you have a sense of when the things that you guys were doing, when they get on his radar or his administration’s radar? Was there someone who was kind of paying attention? Who was sort of beneath him? Or what was that process?
Michael Peterson
Actually, on that Twitter space call last night, I got some new information. I think a lot of it was when there was a Forbes article that was done last summer. And I think that caught the government’s attention. They’re not used to getting positive articles, you know, from publications like Forbes. So I think that got them starting to take a look at what we were doing. And there’s been a lot of subsequent good press.
They’ve also been very open to allow us to meet with them. I mean, we’ve had several meetings where not just with the ministers, they would bring in all their aides, they were really looking and considering what we were talking about. Miles Suter from Square went to the meeting with us when we met with the economic minister. And, you know, he was telling from their perspective of what El Salvador would need to do to attract companies, for companies wanting to headquarter here. And they took it seriously. So I’ve never really run into that before with the government.
NLW
I think that obviously, there’s a huge element of this that’s attracting bitcoin businesses. And that’s something that, you know, has been a constant refrain and question, I mean, really, ever since COVID hit, especially this kind of global competition for talent for tax revenue in the form of companies. But do you know when the legal tender idea got on their radar?
Michael Peterson
I’m not sure. I mean, I’d like to think that we had some part of that, you know, anytime we had a chance with, to do an interview or meet with any of the government ministers, we kept pushing that, that they could be that, that party, the politicians that go down in history for putting the world on a bitcoin standard. They’re already on the US dollar, so they don’t have to worry about it competing with their currency. So they really had nothing to lose, but so much to gain. I don’t know when they started taking that seriously or what kind of got them to go in that direction. But of course, we’re thrilled they did.
NLW
Well, one of the things that I think is remarkable in that is a lot of people are noticing is, I think that if you had polled the average, super engaged, enfranchised bitcoiner on Twitter, you know, at the beginning of 2021, about whether a country would adopt bitcoin as a legal tender as a currency first or bitcoin as kind of a reserve, right, I think almost everyone would have said reserve. And instead, it’s very clear that the example that you guys set of a fully functioning, you know, economy, that includes using it for some people as a long term investment for others as a medium of exchange that really kind of obliterates the lines between these things, was influential. I mean, you know, President Bukele made that clear, even on last night’s call.
Michael Peterson
Well, I think the bitcoin community has become a little too just locked into the “digital gold” narrative. I’m not against that narrative, obviously, I think that’s where everybody should be doing their savings. But bitcoin’s also money.
And especially with the second layer protocols, like Lightning, like it works, it’s easy, it’s easier for me to buy something online, and scan a Lightning QR code than the point my, you know, physical credit card, and give them my name and address and my credit card number and who knows where that’s going to go. So it works for transactions, it works in El Salvador, we’ve seen that and these are people in kind of the hardest of environments, you know, they’re living in places, some of them have electricity, but they can still get online, they still have smartphones, and they’re still transacting. So I think people need to realize it doesn’t have to be money or digital gold, like it is both.
NLW
So I mean, on this front, I actually forgot to ask this question, and then we got talking about something else. The question around what happens when bitcoin goes down? Like, have you seen people be stressed out? How does it impact it as a medium of exchange? I mean, this is the critique that we’re constantly from people who don’t think that bitcoin is viable for this type of setting is, it’s way too volatile. What is your experience with that?
Michael Peterson
That’s been a real big concern of ours from the beginning, but it’s actually been much less of an issue than we anticipated. We’ve seen like, even in this last big drawdown, the people that just recently got into bitcoin, they’re kind of freaking out. But the people who, you know, have only been at it for six months, they’re like, “No, we understand this is how bitcoin works. This is kind of the history of it, we think longer term, it’s going to go back up.”
I actually like it when we have these big drawdowns, because it it kind of squashes the speculative fever, when we’re having that big run up, then I was starting to get concerned because then people were, you know, thinking about borrowing money to buy bitcoin, or selling their family land to buy bitcoin. And we’ve always really discouraged that we want people to dollar cost average in, or for the stores that are accepting bitcoin, like set aside a part of that as their savings. But we don’t encourage people to be overly leveraged.
And we also encourage them to make sure they understand the ups and downs before they go into it deeper. And we do see a little bit of shifts, like most recently, when we saw this big pullback, we did see less people spending their bitcoin at that time. They weren’t, you know, selling it, but they were just holding on to it and not spending it and waiting for it to go back up. So you see slight shifts, but most of them have been pretty adept at, you know, kind of riding the waves and knowing how to manage the volatility.
NLW
When it sounds like that’s like, that’s a natural, mature tension that people have to make decisions on for themselves, right? Like, you’re not getting, it sounds like there’s no denying you guys aren’t trying to obfuscate the fact that bitcoin is this asset that’s likely to appreciate over time based on its particular dynamics and global adoption. But at the same time, the whole point is like people get to make their decisions day in, day out about how much they can use, how much they can save. And that’s just kind of an individual process that everyone in every family has to go through.
Michael Peterson
Exactly, what I will say is it has really, really switched the mentality about savings. El Salvador is a very spending culture. It’s not a savings culture. And we’re seeing people for the first time in their life, like they’re really focused on savings, because they have this sense that well, “what I’m spending today is probably gonna be worth double in the future. So I’m going to spend as little as possible.”
NLW
I think one of the things that I always think about is, I don’t know, if we never talked about this, but I spent the first I don’t know 5, 10 years of my early career thinking that I was going to be focused on global development and global social change. And it’s unbelievable how frequently our kind of good-intentioned thoughts towards other people lead us to infantilizing them, and not giving them decisions. So, something like “people can’t deal with the volatility of bitcoin or they can’t make the decisions for themselves about how much to save versus spend,” like, “we shouldn’t give them the availability to spend it because you know, everyone’s going to want to save it.” Well, that’s just patronizing. Right? You’re not assuming that people have the ability to make decisions for themselves about how to strike those balances. And it’s not something that people do intentionally. Often, it’s just something that kind of happens.
Michael Peterson
I’ve seen that when people come down, they’re kind of shocked at how sophisticated these users are. Especially for a lot of them, they’re living in poverty. And I tell them, hey, these people have made 10 times as many bitcoin transactions as you have, like in real world settings, they know what they’re doing. Even when Strike came down, they were wondering, “why do people keep sending money back and forth between the Strike wallet and the Bitcoin Beach wallet?” Well, they’ve used it as their bootstrap trading engine. When they want to go into bitcoin, they send it out of Strike into the Bitcoin Beach wallet, when they want to go to dollars, they send it out of the Bitcoin Beach wallet into Strike. And they were kind of blown away, like, “wow, we never thought people would use it like that.” So I think it’s really been a showcase for just how much intelligence there is in the region, and that they have just been held back by, you know, bad circumstances. But how much this can change in a short period.
NLW
How, what has the mood or sentiment been like, since the announcement a couple days ago, about this bill, in the places, you know, in the communities that you work?
Michael Peterson
I think it’s been well, obviously, within our team and our community, people have been ecstatic. I think, in the broader country, there is some confusion, you know, there is going to be a learning curve. I was actually at the conference in Miami for the announcement. So I wasn’t in El Salvador, and I’m in San Diego now. So I haven’t been back in the country since the announcement. But I’ve been talking with my team. And overall, they, especially in El Zonte, everybody’s just thrilled because, you know, this this little podunk, you know, beach town, that’s never been that important, you know, in the greater scheme of things in El Salvador, and now it’s the focus of the whole country. And there’s real good paying jobs that are moving in and people that want to be there. And so it’s a real dynamic time for the people in El Zonte.
NLW
How do you guys think about this transition, like, you guys are likely to be looked at as a model, people are going to want to have information from you, you’re going to see more companies that want to come in. I mean, you’ve been very deliberate, intentional, it sounds like and how you’ve rolled these things out, how you’ve helped people figure them out, you know, how you’ve let the programs grow, how you’ve let people take charge of how these different programs are going to evolve. How do you think about this mass new force, both domestically, you know, but also internationally, that could be coming your way?
Michael Peterson
We definitely want to be careful for how that rolls out. We don’t want to disrupt the community, we want to see growth happen in ways that’s good for the environment, that’s good for the quality of life for people. But we really view good paying jobs coming in is really life changing for the people there. A lot of them, you know, five years ago, their only plan or their only thought of how they can make it in life was to sneak into the US and work in some dead end job, and hopefully, eventually come back and retire in the country that they love, you know, having their kids grow up with them, hardly seeing them. Now they feel like “I can become an engineer and get a good paying job here, I can start a company that maybe it’s not directly bitcoin, but it’ll provide services to these bitcoin companies that are coming in.” And we’re seeing people kind of move their way up the food chain. And so for the first time, they’re really dreaming and thinking about how they can help lead the world.
NLW
Has anything particularly surprised you about what you’ve seen from President Bukele and his team over the last couple days?
Michael Peterson
To be quite honest, I’ve been kind of blown away by how aggressive and full-throated their plan has been. I mean, I think even if I had put together a proposal, it might have been a little more timid. And so I’m glad I wasn’t the one putting the proposal together. I mean, they, they really went for it, they’ve really swung for the fences. And I think that’s going to be what it takes for them to win in this. I think there’s going to be a lot of governmental and non-governmental forces that are going to come out and try to thwart this, I think there’s a lot of vested interests that are not going to want to see this work. And so I think they really did have to swing for the fences. And I think if they are successful, it’s gonna just be the first in many countries to go that route. If the forces that be can stop them, I think it’s going to be really hard for the next country to make that decision.
NLW
What’s the best way for bitcoiners who are now interested in investing in this experiment who want to be helpful? What should people be doing other than just paying attention to it?
Michael Peterson
We’d love for people to come down. I mean, El Salvador is a beautiful place to come on vacation, to come work remotely. Especially if you’re stuck in an environment where it’s cold for half the year, you know, why not spend that half here in El Salvador, surfing and doing yoga in the evenings, and, you know, living with other bitcoiners. So, we encourage people to get out there. But also to, to really reflect on what the promise of bitcoin is, for people in the developing world.
A lot of Americans think, “Wow, bitcoin, you know, is good as a store of value, but we have PayPal, we have Venmo, we have all these other things, the banks are fine, you know, I don’t see why you need to use it for payments.” That’s only the case for like 5, 10 percent of the people in the world, the majority of people in the world have horrible banking systems, if anything at all. And so I think Americans are really going to underestimate how quickly bitcoin is going to take over the world. And I think if we’re not careful, we’re gonna be kind of the last one on the boat.
NLW
Mike, this has been an awesome conversation. I love hearing about this project and how it’s evolved. And obviously, your work has not only not gone unnoticed, it’s now been a catalyst for one of the most significant events in bitcoins history. Anything else that we should talk about before I let you go and get back to everything you’re working on?
Michael Peterson
Just let me know when you’re planning on coming down. Because I know you’d like the international scene. And I can’t believe you haven’t been down to visit us yet. Because it is right up your alley. So in so many ways, you need to come down and spend a couple of months there in El Zonte. at Bitcoin Beach. We actually just built out a podcast studio for people like you that want to come down and work from there, so just let me know when you’re coming.
NLW
Michael, thank you so much for your time. And I’m really excited to see what happens next. One really quick thought to wrap up this conversation. There’s obviously so much inspiring about the Bitcoin Beach story. And it’s a story that’s still being written right now. I just want to highlight how significant it is, how much it is a testament to the power of people to create ripples that change the world, just by doing things that make sense to them, and then telling the world the story of those actions. To reinforce this point, let’s just listen to the clip of President Bukele, discussing how Bitcoin Beach was influential in this whole movement.
Clip from President Bukele
You guys demonstrated that this is not something for rich people only. I mean, this is for everybody. And you guys demonstrated that a community can actually benefit from bitcoin. And now we’re going to demonstrate it in a country-wide scale. But of course, you’re the pioneers here. And hats off to you guys, because you had the courage to be the first here and you have done great. And actually, you have provided us with arguments, and with pictures, and with stories, and with everything that we need to have this bill passed.
NLW
More than El Salvador, what I’d love for you to take away from this is that if you have some idea, some way to change the world, some way to impact your life or the lives of people around you, just go for it. Figure out how to get the people who agree with the way that you see things to join forces and do something great, and then talk about it, because you never know where it’s going to lead. I don’t think that in 2019 when they started to do community projects funded by bitcoin, Mike and the folks at Bitcoin Beach thought that it would lead not only to helping a community survive COVID but then to a nation becoming the first nation to implement the bitcoin standard in the world in less than three years. But here we are. Anyways guys, I hope you’re headed into a great weekend. I appreciate you listening. Until tomorrow. Be safe, take care of each other, peace!
Confidence in governments and financial institutions is at an all time low.
It was within the context of this alienation, that Bitcoin was created
Bitcoin is designed to be an alternative or parallel system.
Many Elites take Bitcoin as an Insult
It is hard for a man/institution that is part of the political/economic establishment to understand the value of a project whose very existence was motivated by dissatisfaction with their work.
Many elites stand to lose power
Many elites benefit from federal reserve policy. A company like AT&T can borrow money from the Federal Reserve by issuing bonds that the Fed buys. Rather than use the money from that debt to invest, producing useful things, the executives at AT&T take the money and use it to buy back AT&T stock.
Stock buybacks increase a company’s stock price, allowing executives to collect their bonuses and profit from stock appreciation. Stock buybacks also inflate the stock market, tricking some Americans into thinking stock market gains are sign of a healthy economy.
Banks get special access to lower interest rates. They then charge a higher rate to the public and pocket the difference.
Goal: Ending the Cantillion Effect
The 18th century French banker Richard Cantillion observed that those closest to the printing press benefit more than those further away.
In Cantillion’s day, the money creation was done via gold mining. In our day the Federal Reserve’s “plumbing” requires it to act through the financial system of banks and other institutions, rather than interacting with citizens directly.
The result of the financial system’s structure is that hedge funds, private equity, and bankers have benefitted most from the money printing. It’s structural “trickle-down“.
Bitcoin has the potential to put everyone on a more level playing field because money would not be issued through institutions which have special privileges due to the nature of the financial plumbing.
Bitcoin’s decentralized governance and 21 million coin limit are designed to prevent further such bailouts
An Alternative to Government Digital Currencies
Many people are skeptical of the power that Government-issued digital currencies could provide governments.
If digital currencies are inevitable, which would you rather have:
digital currencies designed and issued by governments like China and the US
digital currencies designed and created by the private sector, including libertarian-spirited programmers and business people competing to be the choice of citizens
Distributed in the most fair way possible
While some later cryptocurrency creators have designated some of the first coins for themselves, the creator of Bitcoin was concerned about distributing the initial coins in the most fair way.
So rather than distributing newly issued coin to people they knew, Satoshi (the Bitcoin author’s pen name) decided to distribute Bitcoin only to those who perform work for the project. This means that Bitcoin is distributed only to those people who run servers that verify transactions. These “miners” can then chose to sell the coin they earn on the open market.
As time progresses, the strength of the encryption Bitcoin uses gets stronger and stronger, so that today it is strong enough to encrypt billion dollar transactions.
Creator of Bitcoin does not “Cash In”
The creator of Bitcoin chose not to patent their solution to the Byzantine General’s Problem and collected no payment for their work. The Byzantine General Problem is a mathematical problem that encapsulated the challenges present in a decentralized system of coming up with a common agreement when some parties may fail to return results and others may present fraudulent information. The solution to this problem allows systems to function without a trusted centralized system.
Contracts without Trusted Escrow
An example of the type of transaction that Bitcoin enables is a real estate purchase without an escrow agent.
Normally, the buyer of the house has to provide money to an escrow in advance so that the seller can trust the the buyer will make good on the purchase. With Bitcoin, a seller can verify that the buyer is using legitimate Bitcoin and within 10 minutes verify that the transaction has settled.
Bitcoin was considered virtually worthless
When Bitcoin was started, there was no price conversion between Bitcoins and dollars.
Many people who first got Bitcoin misplaced it because they didn’t think it was valuable.
Can Bitcoin do what VISA does: 40,000 transactions per second?
VISA can handle 40,000 transactions per second, while Bitcoin can only handle about 7 transactions per second.
But VISA transactions depend upon the the rest of the banking system to settle its transactions. This involves both individual banks and the Federal Reserve
VISA has advertised that it would like to continue to operate as a payment network, but using Crpto as a means of funding, in addition to traditional bank accounts using dollars.
Bitcoin’s technology is superior to the Federal Reserve
Although some people still think of Bitcoin as a currency used for payments, the Bitcoin community chose in 2017 to make Bitcoin a high-performance settlement layer, akin to the Federal Reserve’s Fed Wire.
When VISA payments are processed then are not sent in real time. Rather the banks aggregate transactions and “net out” the totals. They then transfer a single total value to the member bank. These totals are much larger and fewer in number.
While Fedwire transfers can be completed in a day, Bitcoin transactions can settle a billion dollars in 10 minutes!
One of the concerns I’ve seen aimed at Bitcoin is the claim that it’s a Ponzi scheme. The argument suggests that because the Bitcoin network is continually reliant on new people buying in, that eventually it will collapse in price as new buyers are exhausted.
So, this article takes a serious look at the concern by comparing and contrasting Bitcoin to systems that have Ponzi-like characteristics, to see if the claim holds up.
The short version is that Bitcoin does not meet the definition of a Ponzi scheme in either narrow or broad scope, but let’s dive in to see why that’s the case.
Defining a Ponzi Scheme
To start with tackling the topic of Bitcoin as a Ponzi scheme, we need a definition.
“A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.
Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.”
They further go on to list red flags to look out for:
“Many Ponzi schemes share common characteristics. Look for these warning signs:
High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.”
I think that’s a great set of information to work with. We can see how many of those attributes, if any, Bitcoin has.
Bitcoin’s Launch Process
Before we get into comparing Bitcoin point-by-point to the above list, we can start with a recap of how Bitcoin was launched.
In August 2008, someone identifying himself as Satoshi Nakamoto created Bitcoin.org.
Two months later in October 2008, Satoshi released the Bitcoin white paper. This document explained how the technology would work, including the solution to the double-spending problem. As you can see from the link, it was written in the format and style of an academic research paper, since it was presenting a major technical breakthrough that provided a solution for well-known computer science challenges related to digital scarcity. It contained no promises of enrichment or returns.
Then, three months later in January 2009, Satoshi published the initial Bitcoin software. In the custom genesis block of the blockchain, which contains no spendable Bitcoin, he provided a time-stamped article headline about bank bailouts from The Times of London, likely to prove that there was no pre-mining and to set the tone for the project. From there, it took him six days to finish things and mine block 1, which contained the first 50 spendable bitcoins, and he released the Bitcoin source code that day on January 9th. By January 10th, Hal Finney publicly tweeted that he was running the Bitcoin software as well, and right from the beginning, Satoshi was testing the system by sending bitcoins to Hal.
Interestingly, since Satoshi showed how to do it with the white paper more than two months before launching the open source Bitcoin software himself, technically someone could have used the newfound knowledge to launch a version before him. It would have been unlikely, due to Satoshi’s big head start in figuring all of this out and understanding it at a deep level, but it was technically possible. He gave away the key technological breakthrough before he launched the first version of the project. Between the publication of the white paper and the launch of the software, he answered questions and explained his choices for his white paper to several other cryptographers on an email list in response to their critiques, almost like an academic thesis defense, and several of them could have been technical enough to “steal” the project from him, if they were less skeptical.
After launch, a set of equipment that is widely believed to belong to Satoshi remained a large Bitcoin miner throughout the first year. Mining is necessary to keep verifying transactions for the network, and bitcoins had no quoted dollar price at that time. He gradually reduced his mining over time, as mining became more distributed across the network. There are nearly 1 million bitcoins that are believed to belong to Satoshi that he mined through Bitcoin’s early period and that he has never moved from their initial address. He could have cashed out at any point with billions of dollars in profit, but so far has not, over a decade into the project’s life. It’s not known if he is still alive, but other than some early coins for test transactions, the bulk of his coins haven’t moved.
Not long after, he transferred ownership of his website domains to others, and ever since, Bitcoin has been self-sustaining among a revolving development community with no input from Satoshi.
Bitcoin is open source, and is distributed around the world. The blockchain is public, transparent, verifiable, auditable, and analyzable. Firms can do analytics of the entire blockchain and see which bitcoins are moving or remaining in place in various addresses. An open source full node can be run on a basic home computer, and can audit Bitcoin’s entire money supply and other metrics.
With that in mind, we can then compare Bitcoin to the red flags of being a Ponzi scheme.
Investment Returns: Not Promised
Satoshi never promised any investment returns, let alone high investment returns or consistent investment returns. In fact, Bitcoin was known for the first decade of its existence as being an extremely high-volatility speculation. For the first year and a half, Bitcoin had no quotable price, and after that it had a very volatile price.
The online writings from Satoshi still exist, and he barely ever talked about financial gain. He mostly wrote about technical aspects, about freedom, about the problems of the modern banking system, and so forth. Satoshi wrote mostly like a programmer, occasionally like an economist, and never like a salesman.
We have to search pretty deeply to find instances where he discussed Bitcoin potentially becoming valuable. When he did talk about the potential value or price of a bitcoin, he spoke very matter-of-factly in regards to how to categorize it, whether it would be inflationary or deflationary, and admitted a ton of variance for how the project could turn out. Digging around for Satoshi’s quotes on the price of value of a bitcoin, here’s what I found:
“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.”
___
“It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy. Once it gets bootstrapped, there are so many applications if you could effortlessly pay a few cents to a website as easily as dropping coins in a vending machine.”
___
“In this sense, it’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.”
___
“Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it. I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something. (I’m using the word scarce here to only mean limited potential supply)”
___
“A rational market price for something that is expected to increase in value will already reflect the present value of the expected future increases. In your head, you do a probability estimate balancing the odds that it keeps increasing.”
___
“I’m sure that in 20 years there will either be very large transaction volume or no volume.”
___
“Bitcoins have no dividend or potential future dividend, therefore not like a stock. More like a collectible or commodity.”
Promising unusually high or consistent investment returns is a common red flag for being a Ponzi scheme, and with Satoshi’s original Bitcoin, there was none of that.
Over time, Bitcoin investors have often predicted very high prices (and so far those predictions have been correct), but the project itself from inception did not have those attributes.
Open Source: The Opposite of Secrecy
Most Ponzi schemes rely on secrecy. If the investors understood that an investment they owned was actually a Ponzi scheme, they would try to pull their money out immediately. This secrecy prevents the market from appropriately pricing the investment until the secret gets found out.
For example, investors in Bernie Madoff’s scheme thought they owned a variety of assets. In reality, earlier investor outflows were just being paid back from new investor inflows, rather than money being made from actual investments. The investments listed on their statements were fake, and for any of those clients, it would be nearly impossible to verify that they are fake.
Bitcoin, however, works on precisely the opposite set of principles. As a distributed piece of open source software that requires majority consensus to change, every line of code is known, and no central authority can change it. A key tenet of Bitcoin is to verify rather than to trust. Software to run a full node can be freely downloaded and run on a normal PC, and can audit the entire blockchain and the entire money supply. It relies on no website, no critical data center, and no corporate structure.
For this reason, there are no “issues with paperwork” or “difficulty receiving payments”, referencing some of the SEC red flags of a Ponzi. The entire point of Bitcoin is to not rely on any third parties; it is immutable and self-verifiable. Bitcoin can only be moved with the private key associated with a certain address, and if you use your private key to move your bitcoins, there is nobody who can stop you from doing so.
There are of course some bad actors in the surrounding ecosystem. People relying on others to hold their private keys (rather than doing so themselves) have sometimes lost their coins due to bad custodians, but not because the core Bitcoin software failed. Third-party exchanges can be fraudulent or can be hacked. Phishing schemes or other frauds can trick people into revealing their private keys or account information. But these are not associated with Bitcoin itself, and as people use Bitcoin, they must ensure they understand how the system works to avoid falling for scams in the ecosystem.
No Pre-Mine
As previously mentioned, Satoshi mined virtually all of his coins at a time when the software was public and anybody else could mine them. He gave himself no unique advantage in acquiring coins faster or more easily than anyone else, and had to expend computational power and electricity to acquire them, which was critical in the early period for keeping the network up and running. And as previously mentioned, the white paper was released before any of it, which would be unusual or risky to do if the goal was mainly about personal monetary gain.
In contrast to this unusually open and fair way that Bitcoin was launched, many future cryptocurrencies didn’t follow those same principles. Specifically, many later tokens had a bunch of pre-mined conceptions, meaning that the developers would give themselves and their investors coins before the project becomes public.
Ethereum’s developers provided 72 million tokens to themselves and their investors prior to any being available to own by the broader public, which is more than half of the current token supply of Ethereum. It was a crowdsourced project.
Ripple Labs pre-mined 100 billion XRP tokens with the majority being owned by Ripple Labs, and gradually began selling the rest to the public, while still holding the majority, and is currently being accused by the SEC of selling unregistered securities.
Besides those two, countless other smaller tokens were pre-mined and sold to the public.
A case can be made in favor of pre-mining in certain instances, although some are very critical of the practice. In a similar way that a start-up company offers equity to its founders and early investors, a new protocol can offer tokens to its founders and early investors, and crowdsourced financing is a well-accepted practice at this point. I’ll leave that debate to others. Few would dispute that early developers can be compensated for work if their project takes off, and funds are helpful for early development. As long as it’s fully transparent, it comes down to what the market thinks is reasonable.
When defending against the notion of being a Ponzi scheme, however, Bitcoin is miles ahead of most other digital assets. Satoshi showed the world how to do it first with a white paper months in advance, and then put the project out there in an open source way on the first day of spendable coins being generated, with no pre-mine.
A situation where the founder gave himself virtually no mining advantage over other early adaptors, sure is the “cleanest” approach. Satoshi had to mine the first blocks of coins with his computer just like anyone else, and then never spent them other than by sending some of his initial batch out for early testing. This approach improved the odds of it becoming a viral movement, based on economic or philosophical principles, rather than strictly about riches. Unlike many other blockchains over the years, Bitcoin development occurred organically, by a revolving set of large stakeholders and voluntary user donations, rather than via a pre-mined or pre-funded pool of capital.
On the other hand, giving yourself and initial investors most of the initial tokens and then having later investors start from mining from scratch or buy into it, opens up more avenues for criticisms and skepticism and begins to look more like a Ponzi scheme, whether or not it actually is.
Leaderless Growth
One thing that makes Bitcoin really interesting is that it’s the one big digital asset that flourished without centralized leadership. Satoshi created it as its anonymous inventor, worked with others to guide it through the first two years with continued development on open forums, and then disappeared. From there, other developers took the mantle in terms of continuing to develop and promote Bitcoin.
Some developers have been extremely important, but none of them are critical for its ongoing development or operation. In fact, even the second round of developers after Satoshi largely went in other directions. Hal Finney passed away in 2014. Some other super-early Bitcoiners became more interested in Bitcoin Cash or other projects at various stages.
As Bitcoin has developed over time, it has taken on a life of its own. The distributed development community and userbase, (and the market, when it comes to pricing various paths after hard forks) has determined what Bitcoin is, and what it is useful for. The narrative has changed and expanded as time went on, and market forces rewarded or punished various directions.
For years, debates centered around whether Bitcoin should optimize for storing value or optimize for frequent transactions on the base layer, and this is what led to multiple hard forks that all devalued compared to Bitcoin. The market clearly has preferred Bitcoin’s base layer to optimize for being a store of value and large transaction settlement network, to optimize for security and decentralization, with an allowance for frequent smaller transactions to be handled on secondary layers.
Every other blockchain-based token, including hard forks and those associated with totally new blockchain designs, comes on the coattails of Bitcoin, with Bitcoin being the most self-sustaining project of the industry. Most token projects are still founder-led, often with a big pre-mine, with an unclear future should the founder no longer be involved. Some of the sketchiest tokens have paid exchanges for being listed, to try to jump-start a network effect, whereas Bitcoin always had the most natural growth profile.
Unregistered Investments and Unlicensed Sellers
The only items on the red flag list that may apply to Bitcoin are the points that refer to investments that are unregulated. This doesn’t inherently mean that something is a Ponzi; it just means that a red flag is present and investors should be cautious. Especially in the early days of Bitcoin, buying some magical internet money would of course be a highly risky investment for most people to make.
Bitcoin is designed to be permission-less; to operate outside of the established financial system, with philosophical leanings towards libertarian cryptographic culture and sound money. For most of its life, it had a steeper learning curve than traditional investments, since it rests on the intersection of software, economics, and culture.
Some SEC officials have said that Bitcoin and Ethereum are not securities (and by logical extension, have not committed securities fraud). Many other cryptocurrencies or digital assets have, however, been classified as securities and some like Ripple Labs have been charged with selling unregistered securities. The IRS treats Bitcoin and many other digital assets like commodities for tax purposes.
So, in the early days, Bitcoin may have indeed been an unregistered investment, but at this point it has a place in tax law and regulatory frameworks around the world. Regulation changes over time, but the asset has reached the mainstream. It’s so mainstream that Fidelity and other custodians hold it for institutional clients and J.P. Morgan gives their price targets for it.
Many people who have not looked deeply into the industry lump all “cryptocurrencies” together. However, it’s important for prospective investors to look into the details and find important differences. Lumping “cryptocurrencies” together would be like lumping “stocks” together. Bitcoin is clearly not like the others in many attributes, and was launched and sustained in a way that looks more like a movement or a protocol than an investment, but that over time became an investment as well.
From there, folks can choose to look into the rabbit hole of thousands of other tokens that came in Bitcoin’s wake and make their own conclusions. There’s a big spectrum there from well-intentioned projects on one side, to outright scams on the other side. It’s important to realize, however, that even if real innovation is happening somewhere, doesn’t mean the tokens associated with that project will necessarily have durable value. If a token solves some novel problem, its solution could end up being re-adapted to a layer on a larger protocol with a bigger network effect. Likewise, any investment in those other tokens has an opportunity cost of being able to purchase more Bitcoin instead.
Section Summary: Clearly Not a Ponzi Scheme
Bitcoin was launched in the fairest way possible.
Satoshi first showed others how to do it with the white paper in an academic sense, and then did it himself months later, and anyone could begin mining alongside him within the first days as some early adopters did. Satoshi then distributed the development of the software to others and disappeared, rather than continue to promote it as a charismatic leader, and so far has never cashed out.
From the beginning, Bitcoin has remained an open source and fully transparent project, and has the most organic growth trajectory of the industry. Given available information, the market has priced it as it sees fit, out in the open.
The Broader Definition of a Ponzi
Because the narrow Ponzi scheme clearly doesn’t apply to Bitcoin, some folks have used a broader definition of a Ponzi scheme to assert that Bitcoin is one.
A bitcoin is like a commodity, in the sense that it’s a scarce digital “object” that provides no cash flow, but that does have utility. They are limited to 21 million divisible units, of which over 18.5 million have already mined according to the pre-programmed schedule. Every four years, the number of new bitcoins generated per ten minute block will be cut in half, and the total number of bitcoins in existence will asymptotically move towards 21 million.
Like any commodity, it produces no cash flows or dividends, and is only worth what someone else will pay you for it or trade you for it. And specifically, it is a monetary commodity; one whose utility is entirely about storing and transmitting value. This makes gold its closest comparison.
Bitcoin vs Gold Market
Some people assert that Bitcoin is a Ponzi scheme because it relies on an ever-larger pool of investors coming into the space to buy from earlier investors.
To some extent this reliance on new investors is correct; Bitcoin keeps growing its network effect, reaching more people and bigger pools of money, which keeps increasing its usefulness and value.
Bitcoin will only be successful in the long run if its market capitalization reaches and sustains a very high level, in part because its security (hash rate) is inherently connected to its price. If for some reason demand for it were to permanently flatline and turn down without reaching a high enough level, Bitcoin would remain a niche asset and its value, security, and network effect could deteriorate over time. This could begin a vicious cycle of attracting fewer developers to keep building out its secondary layers and surrounding hardware/software ecosystem, potentially resulting in quality stagnation, price stagnation, and security stagnation.
However, this doesn’t make it a Ponzi scheme, because by similar logic, gold is a 5,000 year old Ponzi scheme. The vast majority of gold’s usage is not for industry; it’s for storing and displaying wealth. It produces no cash flows, and is only worth what someone else will pay for it. If peoples’ jewelry tastes change, and if people no longer view gold as an optimal store of value, its network effect could diminish.
There are 60+ years of gold’s annual production supply estimated to be available in various forms around the world. And that’s more like 500 years worth of industrial-only supply, factoring out jewelry and store-of-value demand. Therefore, gold’s supply/demand balance to support a high price requires the ongoing perception of gold as an attractive way to store and display wealth, which is somewhat subjective. Based on the industrial-only demand, there is a ton of excess supply and prices would be way lower.
However, gold’s monetary network effect has remained robust for such a long period of time because the collection of unique properties it has is what made it continually regarded as being optimal for long-term wealth preservation and jewelry across generations: it’s scarce, pretty, malleable, fungible, divisible, and nearly chemically indestructible. As fiat currencies around the world come and go, and rapidly increase their per-unit number, gold’s supply remains relatively scarce, only growing by about 1.5% per year. According to industry estimates, there is about one ounce of above-ground gold per person in the world.
Similarly, Bitcoin relies on the network effect, meaning a sufficiently large number of people need to view it as a good holding for it to retain its value. But a network effect is not a Ponzi scheme in and of itself. Prospective investors can analyze the metrics of Bitcoin’s network effect, and determine for themselves the risk/reward of buying into it.
Bitcoin vs Fiat Banking System
By the broadest definition of a Ponzi scheme, the entire global banking system is a Ponzi scheme.
Firstly, fiat currency is an artificial commodity, in a certain sense. A dollar, in and of itself, is just an object made out of paper, or represented on a digital bank ledger. Same for the euro, the yen, and other currencies. It pays no cash flows on its own, although institutions that hold it for you might be willing to pay you a yield (or, in some cases, could charge you a negative yield). When we do work or sell something to acquire dollars, we do so only with the belief that its large network effect (including a legal/government network effect) will ensure that we can take these pieces of paper and give them to someone else for something of value.
Secondly, when we organize these pieces of paper and their digital representations in a fractional-reserve banking system, we add another complicated layer. If about 20% of people were to try to pull their money out of their bank at the same time, the banking system would collapse. Or more realistically, the banks would just say “no” to your withdrawal, because they don’t have the cash. This happened to some US banks in early 2020 during the pandemic shutdown, and occurs regularly around the world. That’s actually one of the SEC’s red flags of a Ponzi scheme: difficulty receiving payments.
In the well-known musical chairs game, there is a set of chairs, someone plays music, and kids (of which there is one more than the number of chairs) start walking in circles around the chairs. When the music stops, all of the kids scramble to sit in one of the chairs. One slow or unlucky kid doesn’t get a seat, and therefore leaves the game. In the next round, one chair is removed, and the music resumes for the remaining kids. Eventually after many rounds, there are two kids and one seat, and then there is a winner when that round ends.
The banking system is a permanent round of musical chairs. There are more kids than chairs, so they can’t all get one. If the music were to stop, this would become clear. However, as long as the music keeps going (with occasional bailouts via printed money), it keeps moving along.
Banks collect depositor cash, and use their capital to make loans and buy securities. Only a small fraction of depositor cash is available for withdrawal. A bank’s assets consist of loans owed to them, securities such as Treasuries, and cash reserves. Their liabilities consist of of money owed to depositors, as well as any other liabilities they may have like bonds issued to creditors.
For the United States, banks collectively have about 20% of customer deposits held as cash reserves:
Chart Source: St. Louis Fed
As the chart shows, this percentage reached below 5% prior to the global financial crisis (which is why the crisis was so bad, and marked the turning point in the long-term debt cycle), but with quantitative easing, new regulations, and more self-regulation, banks now have about 20% of deposit balances as reserves.
Similarly, the total amount of physical cash in circulation, which is exclusively printed by the US Treasury Department, is only about 13% as much as the amount of commercial bank deposits, and only a tiny fraction of that is actually held by banks as vault cash. There’s not nearly enough physical cash (by design), for a significant percentage of people to pull their capital out of banks at once. People run into “difficulty receiving payments” if enough of them do so around the same time.
As constructed in the current way, the banking system can never end. If a sufficiently large number of banks were to liquidate, the entire system would cease to function.
If a single bank were to liquidate without being acquired, it would hypothetically have to sell all of its loans and securities to other banks, convert it all to cash, and pay that cash out to depositors. However, if a sufficiently large number of banks were to do that at once, the market value of the assets they are selling would sharply decrease and the market would turn illiquid, because there are not enough available buyers.
Realistically, if enough banks were to liquidate at once, and the market froze up as debt/loan sellers overwhelmed buyers, the Federal Reserve would end up creating new dollars to buy assets to re-liquidity the market, which would radically increase the number of dollars in circulation. Otherwise, everything nominally collapses, because there aren’t enough currency units in the system to support an unwinding of the banking systems’ assets.
So, the monetary system functions as a permanent round of musical chairs on top of artificial government-issued commodities, where there are by far more claims on that money (kids) than money that is currently available to them (chairs) if they were to all scramble for it at once. The number of kids and chairs both keeps growing, but there are always way more kids than chairs. Whenever the system partially breaks, a couple more chairs are added to the round to keep it going.
We accept this as normal, because we assume it will never end. The fractional reserve banking system has functioned around the world for hundreds of years (first gold-backed, and then totally fiat-based), albeit with occasional inflationary events along the way to partially reset things.
Each individual unit of fiat currency has degraded about 99% in value or more over the multi-decade timeline. This means that investors either need to earn a rate of interest that exceeds the real inflation rate (which is not currently happening), or they need to buy investments instead, which inflates the value of stocks and real estate compared to their cash flows, and pushes up the prices of scarce objects like fine art.
Over the past century, T‑bills and bank cash just kept up with inflation, providing no real return. However, this tends to be very lumpy. There were decades such as the 1940s, 1970s, and 2010s, where holders of T‑bills and bank cash persistently failed to keep up with inflation. This chart shows the T‑bill rate minus the official inflation rate over nine decades:
Chart Source: St. Louis Fed
Bitcoin is an emergent deflationary savings and payments technology that is mostly used in an unlevered way, meaning that most people just buy it, hold it, and occasionally trade it. There are some Bitcoin banks, and some folks that use leverage on exchanges, but overall debt in the system remains low relative to market value, and you can self-custody your own holdings.
Frictional Costs
Another variation of the broader Ponzi scheme claim asserts that because Bitcoin has frictional costs, it’s a Ponzi scheme. The system requires constant work to keep it functioning.
Again, however, Bitcoin is no different in this regard than any other system of commerce. A healthy transaction network inherently has frictional costs.
With Bitcoin, miners invest into customized hardware, electricity, and personnel to support Bitcoin mining, which means verifying transactions and earning bitcoins and transaction fees for doing so. Miners have plenty of risk, and plenty of reward, and they are necessary for the system to function. There are also market makers that supply liquidity between buyers and sellers, or convert fiat currency to Bitcoin, making it easier to buy or sell Bitcoin, and they necessarily extract transaction fees as well. And some institutions provide custody solutions: charging a small fee to hold Bitcoin.
Similarly, gold miners put plenty of money into personnel, exploration, equipment, and energy to extract gold from the ground. From there, various companies purify and mint it into bars and coins, secure and store it for investors, ship it to buyers, verify its purity, make it into jewelry, melt it back down for purification and re-minting, etc. Atoms of gold keep circulating in various forms, due to the work of folks in the gold industry ranging from the finest Swiss minters to the fancy jewelers to the bullion dealers to the “We Buy Gold!” pawn shops. Gold’s energy work is skewed towards creation rather than maintenance, but the industry has these ongoing frictional costs too.
Likewise, the global fiat monetary system has frictional costs as well. Banks and fintech firms extract over $100 billion per year in transaction fees associated with payments, serving as custodians and managers for client assets, and supplying liquidity as market makers between buyers and sellers.
I recently analyzed DBS Group Holdings, for example, which is the largest bank in Singapore. They generate about S$900 million in fees per quarter, or well over S$3 billion per year. Translated into US dollars, that’s over $2.5 billion per year USD in fees.
And that’s one bank with a $50 billion market capitalization. There are two other banks in Singapore of comparable size. J.P. Morgan Chase, the largest bank in the US, is more than 7x as big, and there are several banks in the US that are nearly as large as J.P. Morgan Chase. Just between Visa and Mastercard, they earn about $40 billion in annual revenue. The amount of fees generated by banks and fintech companies around the world per year is over $100 billion.
It requires work to verify transactions and store value, so any monetary system has frictional costs. It only becomes a problem if the transaction fees are too high of a percentage of payment volumes. Bitcoin’s frictional costs are fairly modest compared to the established monetary system, and secondary layers can continue to reduce fees further. For example, the Strike App aims to become arguably the cheapest global payments network, and it runs on the Bitcoin/Lightning network.
This extends to non-monetary commodities as well. Besides gold, wealthy investors store wealth in various items that do not produce cash flow, including fine art, fine wine, classic cars, and ultra-high-end beachfront property that they can’t realistically rent out. There are certain stretches of beaches in Florida or California, for example, with nothing but $30 million homes that are mostly vacant at any given time. I like to go to those beaches because they are usually empty.
These scarce items tend to appreciate in value over time, which is the key reason why people hold them. However, they have frictional costs when you buy them, sell them, and maintain them. As long as those frictional costs are lower than the average appreciation rate over time, they are decent investments compared to holding fiat, rather than being Ponzi schemes.
Section Summary: A Network Effect, Not a Ponzi
The broadest definition of a Ponzi scheme refers to any system that must continually keep operating to remain functional, or that has frictional costs.
Bitcoin doesn’t really meet this broader definition of a Ponzi scheme any more than the gold market, the global fiat banking system, or less liquid markets like fine art, fine wine, collectable cars, or beachfront property. In other words, if your definition of something is so broad that it includes every non-cashflow store of value, you need a better definition.
All of these scarce items have some sort of utility in addition to their store-of-value properties. Gold and art let you enjoy and display visual beauty. Wine lets you enjoy and display gustatory beauty. Collectable cars and beachfront homes let you enjoy and display visual and tactile beauty. Bitcoin lets you make domestic and international settlement payments with no direct mechanism to be blocked by any third party, giving the user unrivaled financial mobility.
Those scarce objects hold their value or increase over time, and investors are fine with paying small frictional costs as a percentage of their investment, as an alternative to holding fiat cash that degrades in value over time.
Yes, Bitcoin requires ongoing operation and must reach a significant market capitalization for the network to become sustainable, but I think that’s best viewed as technological disruption, and investors should price it based on their view of the probability of it succeeding or failing. It’s a network effect that competes with existing network effects; especially the global banking system. And ironically, the global banking system displays more Ponzi characteristics than the others on this list.
Final Thoughts
Any new technology comes with a time period of assessment, and either rejection or acceptance. The market can be irrational at first, either to the upside or downside, but over the fullness of time, assets are weighed and measured.
Bitcoin’s price has grown rapidly with each four-year supply halving cycle, as its network effect continues to compound while its supply remains limited.
Chart source: Blockchain.com
Every investment has risks, and it of course remains to be seen what Bitcoin’s ultimate fate will be.
If the market continues to recognize it as a useful savings and payment settlement technology, available to most people in the world and backed up by decentralized consensus around an immutable public ledger, it can continue to take market share as a store of wealth and settlement network until it reaches some mature market capitalization of widespread adoption and lower volatility.
Detractors, on the other hand, often assert that Bitcoin has no intrinsic value and that one day everyone will realize for what it is, and it’ll go to zero. Rather than using this argument, however, the more sophisticated bear argument should be that Bitcoin will fail in its goal to take persistent market share from the global banking system for one reason or another, and to cite the reasons why they hold that view.
The year 2020 was a story about institutional acceptance, where Bitcoin seemingly transcended the boundary between retail investment and institutional allocations. MicroStrategy and Square become the first publicly-traded companies on major stock exchanges to allocate some or all of their reserves to Bitcoin instead of cash. MassMutual became the first large insurance company to put a fraction of its assets into Bitcoin. Paul Tudor Jones, Stanley Druckenmiller, Bill Miller, and other well-known investors expressed bullish views on it. Some institutions like Fidelity were onboard the Bitcoin train for years with an eye towards institutional custodian services, but 2020 saw a bunch more jump on, including the largest asset manager in the world, BlackRock, showing strong interest.
For utility, Bitcoin allows self-custody, mobility of funds, and permission-less settlements. Although there are other interesting blockchain projects, no other cryptocurrency offers a similar degree of security to prevent attacks against its ledger (both in terms of hash rate and node distribution), or has a wide enough network effect to have a high probability of continually being recognized by the market as a store of value in a persistent way.
And importantly, Bitcoin’s growth was the most organic of the industry, coming first and spreading quickly without centralized leadership and promotion, which is what made it more of a foundational protocol rather than a financial security or business project.
This blog offers thoughts and opinions on Bitcoin from the Swan Bitcoin team and friends. Swan Bitcoin is the easiest way to buy Bitcoin using your bank account automatically every week or month, starting with as little as $10. Sign up or learn more here.
