 This is Mises Weekends with your host Jeff Deist. Ladies and gentlemen, there are a lot of people, probably too many people, writing about and talking about Bitcoin, blockchain and cryptocurrencies in general. But one person in that field actually knows what she's talking about. She's our guest this week on our great friend, Caitlin Long. She gave a presentation recently at our event in San Francisco. A really fantastic and informative survey of what blockchain could mean for the financial industry and how it could revolutionize that industry in ways that are good for you and not so good for the institutions that currently make a lot of money by being fed connected. She also works with her home state of Wyoming to draft some crypto and blockchain friendly technologies. She's a fascinating person. She's a prolific writer and speaker on this topic. So stay tuned for a great weekend show. I'd like to organize the 40 minutes that we'll have prepared remarks by talking about two problems to which the solution is Bitcoin and blockchain. And I'm going to frame them in an Austrian way but do it in maybe a little bit non-Austrian, not precise Austrian methods because I believe that some of the Austrian methods have been a little too narrow. And we've missed some things and I'll explain that as I go through. But the problems I'm talking about are the moniness of credit and inaccuracies in Wall Street ledger systems. The moniness of credit is a phrase that Doug Nolan, one of my favorite economists uses. He's not strictly Austrian but he writes the credit bubble bulletin. And history will be very kind to his chronicling of the credit bubble that we've been in for the last 30 years. And what he means by moniness of credit is that debt instruments in the fixed income markets, things like bonds, Treasury bonds, Fannie Mae, Freddie Mac bonds, actually function as money in institutional markets. And I'll go into that and explain why that has helped proliferate the debt bubble that we're in. The second problem is Wall Street's ledgers are inaccurate. Inherently they lose track of who really owns what and we should not trust our brokerage statements. The solution to both of these problems, which of course both stem from the fact that we have unsound money, is creating sound money, creating an honest ledger system. The current system creates more claims to wealth than there is real wealth in the economy. And yet the solution is fixing that. It's right in front of our faces with this new technology. I'm not going to give you a downer of a speech though in talking about these problems because I'm actually quite optimistic. Bitcoin is what makes me optimistic that the future is not bleak. It is history's first universally honest ledger. It's the only one that truly exists in many ways. And it has fomented the rise of a parallel financial system that is now quite large. And I'll explain. All of us have read Murray Rothbard's Mystery of Banking. That book was written in 1983. Hold that date in your mind. But I believe and he explains how fractional reserve banking works in this book. We all understand how it works in the traditional banking system. You take a dollar of monetary base and it gets multiplied up into ten dollars of M2. But the reality is that's not how the financial system works anymore. And most of the credit that has been created in the last 25 years has been created outside of the traditional banking system. It still exists, but it's just not that meaningful. What's more meaningful is the shadow banking system. And I believe that if Rothbard were alive he would have written a sequel to The Mystery of Banking, which would be called The Mystery of Shadow Banking. That's a book that I very much hope that an academic picks up and writes. And that's because money has taken on a much broader definition in the securities markets than the traditional definitions of fiat money. Effectively, money is anything that can be financed in the securities financing markets, especially that which the primary dealers can finance at the Fed, either through the repo market or through the discount window. And that means Treasury bonds, Fannie Mae and Freddie Back bonds, mortgage back securities, even corporate bonds, effectively become money because they can be financed at the discount window and in the repo market. A repurchase agreement is an agreement to pledge a security in exchange for a loan of cash and then repurchase it later at an agreed price. So that's an implicit discount rate. Most of the repo market is overnight. And in fact, actually, instead of the Fed injecting monetary base into the traditional banking system, the Fed creates money by injecting monetary base into the repo market. It is a very important market that is not well understood by Austrians. And I think that that's one of the reasons, as I'll talk in a little bit, why some of the Austrians missed the impact of the financial crisis, predicting that we would see hyperinflation and we didn't. I'll explain a little bit more about that in a moment. But the degree of moneyness of fixed income assets fluctuates. It ebbs and flows. Sometimes the repo market will finance non-investment grade bonds. Sometimes they won't. There's no bid for those. But what got me down this path was scratching my head, wondering why sometimes in the repo market, treasury bonds are more valuable than cash. You actually have a negative interest rate to borrow a treasury bond. It's what's called the general collateral financing rate, GCF rate, when periodically that goes negative. What that means is that in the institutional money markets, treasuries are more valuable than cash. And the reason is that they can be repoed. They can be rehypothecated and leveraged multiple times, whereas cash cannot be. The impact of all of this, I won't spend more time on the definition of it, but I wanted to lay it out because the impact of all of this is ballooning debt, particularly since 1983 when Rothbard happened to write his book. And again, I think if he were alive, he would have known this. He would have been all on top of it. But let's dive into now some of the numbers, explaining why the muddiness of credit has resulted in this monstrosity that it's on the graph right here, which is non-financial sector debt. We're now in the United States at 72 trillion of non-financial sector debt. And as you see, there's been no deleveraging, has not actually declined. And I'm focusing on non-financial sector debt instead of total debt for one simple reason, the financial sector intermediates debt out into the real economy. And so if you look at total debt where you count financial sector and non-financial sector debt, you're actually double counting. The real borrowers in the economy are of course outside of the financial sector and that's why I focus on this. And it turns out this analysis, if you define money and credit more broadly and to include the entire fixed income market effectively, what you're picking up is some very interesting things about the economy. Of course in here in this, you see that the federal government was the bulk of the increase in the borrowing as well as the state and local governments and the Fed itself since the financial crisis. We're going to track this area under in this graph as a single red line in the next couple of charts. And there's our red line. Our total non-financial sector debt is now 72 trillion. That's just the sum of all of the different colors in the previous graph. But what I've added to this chart is cumulative private sector savings. This is an Austrian analysis in effect by saying that we need to compare the amount of debt that's been borrowed to the amount of savings that was saved. Because as you know, Mises would say that the amount of debt that was borrowed from real savings is legitimate debt. He called that commodity credit and the amount of debt that was borrowed in excess of real savings was the illegitimate debt, the circulation credit. And in effect this chart puts some numbers to that. Everything from zero up until the green line is commodity credit in effect. That's the legitimate amount of debt. Everything between the green line and the red line is the circulation credit. And it turns out that as you see, the red line is significantly above the green line and that's cumulatively since World War II, almost entirely since we went off the gold standard. We've borrowed $40.5 trillion of excess debt. In effect $2 of debt for every $1 of savings in the U.S. economy since World War II. We're now going to look at this exact same data set except instead of looking at the stock, we're going to look at the flow. Instead of looking at the period end amounts outstanding, we're going to look at the change. And it turns out, we're going to follow that in the next three slides, it turns out that there's some tremendously interesting observations that you can pull out both about the economy and about financial markets by looking at it this way. So there's our red line except now we're looking at the change in debt borrowed and the green line is just the amount of savings in each of those quarterly periods dating back to just after World War II. But what I wanted to share with you here is that if you look at the left-hand side of the chart, the red and green lines are basically right on top of each other. That's not a function of the scale of the chart. That is a function of the fact that we actually had a tether on the amount of debt that could be created in the financial system. It was called the gold standard. And before 1968, it turns out that those two lines in any given year were one might be a little bit ahead of the other, but they'd always equal out. It was just a timing difference. If you dive into the numbers, we really truly were an equity-financed economy where the amount of debt that was borrowed was actually equal to the amount of savings saved in the economy prior to 1968. 1968, we started cheating, as we know, because of guns and butter. And then afterwards, every year, except for one, you see where the financial crisis was right there, a little itty bitty bit of deleveraging in one year, I mean, one quarter, actually, but debt has increased savings every year since we broke the tether on debt growth, which was the gold standard. And now let's look at that same graph in highlighting two different things, which is monetary policy decisions. The first one, of course, we just talked about. We all know in 1971, we broke the tether on debt growth by abandoning Bretton Woods after having been cheating since 1968. But it turns out, I think, the bigger... Yeah, maybe not the bigger mistake, but a tremendous mistake that I haven't seen anyone write about happened in 1982. Remember Rothbard wrote his book in 1983, and that was when the Fed shifted from targeting the quantity of credit to targeting the price of credit. When they did that, they gave the keys to the kingdom, to the financial sector, to create as much debt as it wanted, as long as the price of credit, the Fed funds rate, remained in the target area. And that's when we really started to see, and you see it on the chart, beginning in 1983 under Volcker, you really started to see that red line start to take off relative to the green line. And ever since then, the financial sector has gone to town creating debt. That was a tremendously colossal error. It happened again under Volcker. And what's interesting is they never announced it. So Rothbard wouldn't have been able to pick it up at the time, unless he were reading the Fed Minutes, which were released several years later. I only found it because of an academic who was writing about it, understanding that it just happened in one meeting. It was never publicly announced, but you can see how that was a meaningful change. Instead of targeting the quantity of credit and trying to control M1, they were now targeting the price of credit and have targeted the Fed funds rate. Now let's look at that same data set but highlight different things. It turns out that every time that red line grows a lot faster than the green line, we have a financial market bubble. And I'm tracing five bubbles here, only the first of which happened before that fateful 1983 decision. And you see in 1974, we had a financial market bubble. The S&P went from 68 to 107 between 1974 and 1976, and then it crashed. And then we had that fateful decision beginning in 1983, where you really start to see the debt numbers take off. And that culminated in the 87 crash. Then you see in the late 90s, the third bubble is the tech stock bubble, and then of course the housing bubble, which is the biggest one to date, at least by these metrics. And then I believe we are in a government finance bubble, we're not at the end of that bubble yet, and that is probably the granddaddy of them all. So how much debt capacity remains? If you look at it on this basis, it's an interesting question because it helps to explain why we haven't had the collapse yet. A lot of Austrians were saying when we abandoned the gold standard in 1971, the dollar was going to collapse. But I think what was missed at that point in time was an understanding that we had a tremendous balance sheet. There was basically no debt, no net debt on the balance sheet of the United States at that point in time. Because our grandparents and their grandparents and their grandparents had bequeathed us a tremendous balance sheet against which we could start to borrow. And we really started borrowing beginning in 1968, as you saw, and we haven't stopped. We haven't gone to town. But the blue line I've introduced in this chart is U.S. net wealth. And you notice it's always above the red line. Net wealth is the amount of unencumbered assets owned by Americans, unencumbered by debt. The red line is the total amount of nonfinancial sector debt. You may be thinking, aren't I double counting because I'm pulling out the debt from net wealth and then I'm comparing it again to the debt. What I'm really trying to get at is at a macro level, I know we hate that word, but we aggregate all the borrowings of individuals and aggregate all the assets of individuals. How many unencumbered assets are there that can support all that dollar-denominated debt? And it turns out that there are more. The total amount of U.S. net wealth right now is 92 trillion, and the total amount of nonfinancial sector debt is 72 trillion. We're adding about 2.5 to 3 trillion of nonfinancial sector debt a year. So what this suggests potentially is that it could keep going. I think it more specifically explains why the dollar hasn't collapsed yet, because there's asset value implicitly supporting the dollar. That's the spread between the blue and red lines. But here's the fly in the ointment of this analysis. It's circular, because the asset value is supported by the debt itself. And so at some point this is not to say that we're going to continue forever being able to support asset values with issuing more debt and pushing interest rates down. And there's a $20 trillion spread right now between total U.S. net wealth and nonfinancial sector debt. But remember the circulation credit that will in theory be liquidated is $40.5 trillion. So it does suggest that unfortunately this is not going to end well. This doesn't help tell us when it's going to end, but it helps I think explain why we didn't see the crash and the end of the dollar yet. Let me turn now to the second problem, which is issues in Wall Street's ledger systems that are prone to inaccuracies. And it's related to the earlier problem. I'll connect them in a moment. But the way securities used to work was very simple. Issuers issued this stock certificates in paper form to the investor and what I say by investor there is either you individually or through your agent like a pension fund or a mutual fund or an insurance company. But you always owned the stock certificate in paper form. That's how it used to work. Since 1994 we've got this very convoluted procedure here where you see that the issuer issued securities to a company called CDN Co which is owned by the Depository Trust Corporation and then the custodians hold securities on your behalf. So there are a minimum of three sometimes five or six layers between you and the issuer. When I first figured this out it was amazing. I was working in the capital markets and looking at a bond prospectus and in the prospectus is language that says that the issuer of the bond has no obligation to pay interest and principle to the investor. Think about that. That is expressly in the bond prospectus. You are buying a bond and you are not getting an obligation to pay interest and principle from the issuer. What's happening is the issuer is paying CDN Co who has an obligation to pay the custodian who has an obligation to pay you. These layers of intermediaries create unnecessary counterparty risk, operational risk and the risk that the system gets out of sync because each one of those layers is reconciling against each other until five or more like ten years ago all of these companies batch processed their transactions overnight. That's part of the reason why it took three days now it's two days to settle securities transactions because it's got to go through layers of intermediaries each one of them needing a day overnight to process the transactions. So you can see that this system inherently foments inaccuracies because they're not all going to be in sync at the same time and it also creates settlement delays where it requires two days to settle securities transactions. However, the technology no longer requires that. We've long passed moved the need to have this crazy system but we're stuck with the legacy. What are the problems? Some of you are probably skeptical and thinking I trust my brokerage account. I trust my broker. I've never found a mistake. They're honest. Let me give you some examples. The first one was just about a year ago in litigation in Delaware, Dole Food. There was a class action lawsuit and it the details are not important but here's what matters. There were 36.7 million shares of Dole Food outstanding and in a class action lawsuit there were 49.2 million statements to the consideration in the class action lawsuit. Again, 49.2 million people had valid brokerage statements showing that they owned Dole Food shares all of whom had valid brokerage statements. 49.2 million but there were really only 36.7 million Dole Food shares outstanding. That's what Patrick Byrne will call the bezel when he talks in a moment. If that makes you not trust your brokerage statement good because I don't trust mine, all of those 49.2 million showed up on valid brokerage statements and again it's because of these layers of intermediaries that can get out of whack at any given moment in time. Procter & Gamble you might have read there was a big proxy fight. It was all over the business newspapers at the end of last year. Well in the first count in the proxy vote it came out that Procter & Gamble's candidate won by 6.2 million votes they did a second count and it turned out that the challenger Nelson Peltz won by 42,780 votes and then they did a third count and it swung back Procter & Gamble won by 498,312 votes let me go through that again the first vote was plus 6.2 million the second was minus 42,780 and the third was plus 498,312 if this doesn't give you any confidence in financial systems good because it shows you how wildly inaccurate the accounting systems are that we can't even get an accurate proxy vote count. The reality is Procter & Gamble after that third count threw in the towel and said and invited Nelson Peltz on the board they had already spent 125 million dollars between them fighting over that board seat and they knew there was no possibility of getting an accurate vote count and so they just decided to stop fighting and invited Nelson Peltz on the board Yahoo! had a similar situation there was a recount of a proxy contest that revealed 20% of the votes had been miscounted I won't go into the details about Dell they're a little more complicated but the gist is it cost T-Row price 194 million dollars because of something that wasn't even their fault related to the fact that they were no longer the record owner of the securities I personally ran into a situation where I observed unauthorized securities lending happening in a pension fund that would not have been discoverable because it wasn't showing up on the brokerage statements there's a lot of shenanigans that happen behind the scenes in the accounting systems and they're inherently they inherently just don't stay in sync with each other but here's the granddaddy of them all oh by the way on the bottom right I actually put the title of a speech the blockchain plunger there's a judge in lower who's been a huge supporter of blockchain technology and his speech that he gave to the council of institutional investors is called the blockchain plunger using technology to clean up proxy voting and take back the vote he's a huge believer that the current system is fundamentally broken and we need to deploy blockchain in order to fix it but on the upper right is the granddaddy of them all the market that most over issues securities through the ledgers accounting systems of wall street and that's the US treasury market there's an IMF economist who's done a study to try to estimate how much treasuries have been over issued and he doesn't call it that he calls it collateral velocity it's back to that repo market I was talking about the repo market is how most funding happens in how most money and credit is created in the financial system it's a huge market it trades on average 4.6 trillion dollars a day in the United States and he estimates how many times a single treasury bond has been posted as collateral the very same treasury bond has been posted two times as collateral down from three times since the financial crisis so there's been a little bit of deleveraging but in plain English what that means is that one in every three parties who thinks they own a US treasury security actually does because there's really only one treasury security and even though all those financial institutions are reporting that they own the treasury security because that's how repo accounting works the way it works is you put a dollar of debt against that asset and then you turn around and repledge that asset and the other party puts a dollar of debt against that same asset and that keeps happening that's that's how fractional reserve banking happens in the shadow banking system and it happens on a much larger base because remember money in the shadow banking system includes every money in the shadow banking system Freddie Mac bonds too whereas the feds balance sheet in the traditional banking system is a much smaller number so what effectively he's saying when you think about in the traditional banking system M0 typically gets multiplied by 10 to become M2 well the M0 of the shadow banking system is a much larger base and that gets multiplied by two to get a much much much bigger number in effect a money creation regime that we don't really understand and it's very opaque but this economist has done a tremendous amount of work identifying just how over issued government bonds it's not just in the U.S. but all over the world is so that ties back that monies of credit point to the fact that the accounting systems of Wall Street don't keep track keep accurate track of who owns what it's a game of musical chairs and it's not going to end well if I'd given this speech to you in 2014 or 2013 I would have ended here and it would have been a downer because it would have made everybody feel really uncomfortable but the good news is we have a solution and that is history's first honest ledger and that is a blockchain a universally honest ledger it is a ledger system that is governed by the laws of math not the laws of man and therefore it can't be tampered with because the laws of math are immutable and there is no subjectivity in it a blockchain allows multiple parties to see the same data at the same time and trust that it's valid again a blockchain in simple terms allows multiple parties to see the same data at the same time and trust that it's valid it is a new form of database technology that creates a single golden copy that all of the parties can share shared infrastructure that's why the banks are all interested in this they all keep their own copies of ledgers and then reconcile against each other well if there's a way that they can keep only one ledger and not have to reconcile they can cut a lot of costs out maybe they can cut all the time to settlement of securities transactions and payments out too Bitcoin was the first blockchain it was created in October 2008 by Satoshi Nakamoto we don't know who Heishi or they is or were but what Satoshi did was create the first truly denationalized money that wasn't specie it has a finite number it will never have more than 21 million bitcoins issued by algorithm that that really can't be changed I'll talk about that in a minute but what Satoshi's breakthrough was he solved what's called the Byzantine Generals problem which is the the computer science problem that computer scientists had been grappling with for almost 40 years which is when information moves across time and space how do you know that it hasn't been tampered with in between where it was sent and where it was received this was they called it the Byzantine Generals problem because in Byzantine times the generals were sending messages back and forth to each other on the battlefield information moving across time and space how do you know that the information that was received is exactly the information that was sent and Satoshi solved that by creating a brilliant system that is not just about technology in fact the brilliance of the system is that it's a combination of technology and game theory and this is a very important thing to understand it's built on both cryptography and incentives economic incentives I'll talk about that more in a bit but it's not just about technology it's very much about understanding incentives and because of that beautiful balance of technology and incentives it's never been hacked you may think gosh wait a minute I read about hacks all the time the hacks that have happened have happened on applications that were built on top of the underlying bitcoin blockchain but the underlying bitcoin blockchain has never been hacked and it's been out there for almost 10 years now and no one's figured out how to hack it and it's got a heck of a hacker's bounty it's now worth about 140 billion dollars keep in mind it's sitting out there with no firewall and the wilds of the internet with everybody attacking it every day because of its balance beautiful balance between technology and economic incentives it has withstood all of those attacks it's also a marvel of technology though let me give you the network uptime statistic since the first bitcoin was mined on January 3rd 2009 and that is 1.9922904% that is in excess of 6 sigma quality control and the crazy thing about it is there's no system administrator they do network upgrades on the fly they don't take the network down it is an incredible piece of software but it's an even more incredible piece of money because of again the incentives that are built into the system in general the bitcoin network has had everything go up into the right terms of the number of users the number of wallets the hash rate which is the computer processing power supporting the network and in general the price obviously it fluctuates wildly but it is still in a bull market uptrend technically and the things that have happened in this market are just crazy Coinbase which is the largest player in the market was opening 100,000 accounts a day in November and December of last year and it now has more customers than Schwab so it's crazy what's happened in this sector it does indicate of course a speculative frenzy but it also indicates a desire for something other than a financial system that I think most people understand isn't fair and doesn't quite work the way we want it to let me talk about the two Austrian objections to bitcoin I put the regression theorem on this slide but there's another one that's more general that I hear and it's related which is bitcoin's not backed by anything that's what Peter Schiff Peter Schiff's big critique of bitcoin is but a lot of Austrian scholars critique it and stayed away from it because of thinking that it violated the regression theorem and in fact the answer to both of these critiques is the same which is that bitcoin is really a payment system inextricably intertwined with the token it's not right to compare bitcoin against the dollar or yen or euro it's apples to apples to compare bitcoin against the dollar yen, euro, etc. plus visa and mastercard and FISERV and Fidelity National and all of the companies in the payments ecosystem that process and confirm transactions and so what's backing bitcoin what's backing bitcoin is that payment system is a service that people are willing to pay for in the form of in the case of bitcoin being diluted by the inflation that happens as the miners are paid new bitcoins as they confirm transactions that is what backs bitcoin there is a utility to it there is a use value to it it is the payment processing system in fact the US payment system I looked it up has a market value of $600 billion and that's just the S&P payment sector there are a lot of other technology companies that make the hardware in the payment system like the ATMs and the point of system swipe machines for credit cards and the like that are not included in that $600 billion number so there's clearly value to payment systems and what I think these critics are missing is that the value of bitcoin is that the payment system and you cannot separate it from the token and indeed that's how I would answer the critique of the regression theory theorem the regression theorem says that the origin of money is that it was a commodity that became valuable in exchange and we can trace money back to the actual commodity that was used in exchange in barter transactions and that money's initial value must have use value well in fact actually I would argue use value is that payment system and in the beginning bitcoin didn't have value because it was just simply a unit of account in a ledger but then people started using that ledger to confirm transactions and keep track of value once people started using that ledger then bitcoin started to have value that is the utility that is how we can trace that it spontaneously arose as a commodity it had utility and that's how it answer that it doesn't violate the regression theorem and hopefully walking through that made you think a little bit if there are skeptics among us which I'm sure there are I'm actually in the process of doing some research digging into valuing bitcoin as if you were valuing it the same way you value visa or mastercard looking at all the cash flows in terms of transaction fees and that block reward that's thrown off of the bitcoin network and valuing it using a cash flow model just the way an equity research analyst would or looking at the return on invested capital relative to the invested capital bitcoin has a much lower invested capital in confirming payments than the existing payment system does think about all the bricks and mortar in the existing payment system all that hardware at every merchants that has a credit card machine you don't need any of that in bitcoin none of it so it's a very capital light technology a payment system and therefore the return on invested capital is going to be a lot higher and so per transaction the bitcoin system in theory if you looked out at the way an equity analyst would is worth a lot more and so you'd pay a much higher multiple than you would for a visa and mastercard which has to have all that bricks and mortar all that hardware I haven't done that analysis yet so that's a theory I'll report back at some point when I get that done but I'm almost positive that that's going to justify bitcoin's value in some zip code again if the total payment system in the US is worth 600 billion and bitcoin which is much more efficient is worth 140 billion that tells you it's actually not that far off and that 600 billion payment system value I think is under stated and by the way that's just the US as well so more to come on that I just have two more slides but this one I need to spend some time on because there is a tour de force book some of you have probably read it but as I've chit-chatted with folks a lot of you didn't know this existed it's been out for three weeks it's called the bitcoin standard and it's written by an Austrian I've never met him Amos I assume is how you pronounce his name it's called the bitcoin standard the decentralized alternative to central banking and he's a professor of economics at Lebanese American University this should be in everyone's library every Austrian's library it is a tour de force the first seven chapters get into the history of money leading up to why bitcoin is so special and so unique and to me there's so many things you can take away from this book but to me the big thing is that money historically has been supplanted by new versions of money when technologically innovations come in and necessitate the move to a different form of money he goes through the ray stones in Yap Island some of you are probably very familiar with that and how they suddenly ceased being money when somebody figured out a way to produce them but the reason why they retained their value for so many years in that economy was because they had a high stock to flow ratio stock to flow ratio and were so expensive to produce which is analogous to what bitcoin is I want to read a few quotes from his book because I think they'll help you understand just how special the book is but more importantly how special bitcoin is one is where is in a modern central bank the new money created goes to finance lending and government spending in bitcoin the new money goes only to those who spend resources on updating the ledger that's pretty interesting there's never been money created where those who create the new money who mine the gold or silver or collect the seashells there's never been money where the seniority went back into the the money itself and that's how bitcoin was designed the people who get the benefit of the inflation are the ones who are securing the network and confirming the transactions here's another one bitcoin is the hardest money ever invented growth in the value cannot possibly increase its supply it can only make the network more secure and immune to attack as more people come into bitcoin the incentive for more cpu more computer power to process the transactions increases because the miners can make more money so you get more and more secure as more and more people come into bitcoin but that does not change the supply of bitcoin so again the incentives are very nicely aligned the difficulty adjustment which is essentially that the math problem becomes harder as bitcoin goes up and more people come into the network the math problem that the miners have to solve the difficulty adjustment is the most reliable technology for making hard money and limiting the stock to flow ratio from rising and it makes bitcoin fundamentally different from any other money again if we get a big discovery of gold that's going to cause the value of gold to drop because it's becoming cheaper to produce but in bitcoin if you get a big discovery and a whole bunch of people come into the network bitcoin becomes more expensive to produce that's in part what keeps it so valuable and there is no other money like it bitcoin and cryptography in general are defensive technologies that make the cost of defending property and information far lower than the cost of attacking them that's an incredible statement because it means that the cost of defending your property right is a lot cheaper than the cost of somebody trying to take it away from you and again that's the design of bitcoin I really hope you dig into this book but the last comment that I'll share is I think the most pointed which is the bitcoin ledger of transactions might just be the only objective set of facts in the world and that is because of the verification methodology in bitcoin you've heard the phrase lies damn lies and statistics there is no such thing in bitcoin because everything on the bitcoin network has been verified using math and it's immutable it cannot be changed it is folks the first honest ledger in history and that is why it's so powerful let me end by talking about how this sector has flourished and Patrick Byrne I'm sure is going to pick this up and talking about something called utility tokens or securities tokens blockchain has now been used to effectively issue what are securities like instruments but they're not securities they are something called utility tokens they are issued and traded and settled on a blockchain but they're redeemable for consumptive goods so you can now download music on a company called on a blockchain called Ujo or you can trade photographs on Kodak coins blockchain or airline miles I suspect will probably eventually be on blockchains issued and traded on blockchains and my native state of Wyoming as Jeff said did something really interesting we passed five blockchain bills I spent the entire month of February in Wyoming with this gentleman Tyler Lindholm he's my hero by the way it's funny when I was at the Satoshi round table right before I went to Wyoming I predicted I said there's this guy who's very wrong Paul like in Wyoming and he's going to help us get these bills passed and the skeptics in the room said and there of course they're going to fail but in fact actually we got them all through and two of them were passed unanimously in the house and the senate and the most important one in some respects is the utility token bill which exempts utility tokens from securities and money transmission laws in the state of Wyoming we also exempted crypto assets from the money transmission laws generally and we exempted crypto assets from property tax there's already no income tax so we made Wyoming there's really really interesting state from the perspective of the crypto industry and by the way Tyler got through a bill independent of this that recognizes species as legal tender we're going to be working on getting crypto assets recognized as legal tender in Wyoming next so we can always come back to those who say that the dollar has to exist because we have to pay our taxes in it while legal tender in these states that recognize species as legal tender can be something other than the US dollar and the same thing is true if we can get crypto assets recognized as legal tender but I wanted to share with you this there's a parallel financial system that is arising as a result of these utility tokens and some of you probably never heard of them some of you probably have there's a frenzy in the market right now but this this market is huge it's huge it's a whole new form of venture capital where startups are now funding their their businesses through issuing utility tokens on a blockchain and the again these tokens are redeemable for consumptive goods in their network but they're also a way to finance the company in a way that traditional venture capital is it's the planting traditional venture capital and folks here's the number in the first quarter 6.3 billion dollars was raised in the initial coin offering market that is 40% of the initial public offering market in traditional stock markets that only raised 15.6 billion in the first quarter and the amount and it's 30% of the venture capital raised in the first quarter so you got a market that didn't even exist three years ago that's now 40% of the size of the IPO market and 30% of the size of the venture capital market there's this bitcoin thing is a thing and it's and I think it's fantastic because it's all happening in parallel and completely outside of the traditional financial system and all of the tokens that are issued and traded on a blockchain's are traceable back to the owner and conclusion let me say I think capital markets won't be fair unless and until they use honest ledgers and the great thing about the utility tokens is that they are using honest ledgers where the real owner is the record owner that's recorded in the ledger the assets are issued traded and settled on a blockchain I really do believe that the future of money to make reference to the theme of this event the future of money is bitcoin and also believe that the future of capital markets is blockchain thank you with that I think we'll take some questions subscribe to Mises weekends via iTunes U, Stitcher and SoundCloud or listen on Mises.org and YouTube