• This isn’t a new theory

• Adam Back has never been successful in crypto

• The evidence presented in the NYTimes article is weak af

• It is wildly irresponsible to accuse someone of being Satoshi.

I am resurfacing briefly because I had several friends reach out to ask about John Carreyrou’s NYTimes article accusing Adam Back of being Satoshi. The article is embarrassing, irresponsible, and wrong. Adam isn’t Satoshi he is a mildly more sophisticated version of Craig Wright.

He fucking wishes

The New York Times just published an "investigative" report claiming to have unmasked Satoshi. They claim that Satoshi is Adam Back. I’m honestly embarrassed on their behalf. The idea that Adam Back might be Satoshi is not new, not true, not backed by interesting evidence and quite frankly is irresponsible.

This isn’t a new or novel theory

Adam Back is not a new candidate for Satoshi. I wrote about how the evidence for Back-as-Satoshi wasn’t convincing back in 2021. Back was one of the academics active on the same (very small) mailing list as Satoshi during the development and initial launch of Bitcoin. He was there when Satoshi was active and not many people were. Most of the other people who were active at that time have either stepped away or stayed away from the cryptocurrency scene and stayed focused on pure cryptography. That’s the best and most convincing evidence there is. No reasonable person should find it convincing.

Satoshi has a history of accomplishment. Adam Back does not.

Satoshi built the largest network in cryptocurrency with nothing but a whitepaper. Adam Back spent hundreds of millions of dollars in venture capital and has nothing to show for it but conference keynotes and podcast interviews. He has neither the intellectual capacity nor the personal integrity to be Satoshi. His understanding of cryptocurrency is rooted exclusively in cryptography, he does not understand economics at all. That’s why the Liquid Network remains a tiny backwater even within the world of crypto networks. Back doesn’t understand economics, he only understands cryptography. Nothing Adam has worked on under his own name is particularly interesting or successful. If he didn’t carefully cultivate the impression that he might be Satoshi no one would know who he is.

The correct way to understand Back is not as a peer to or candidate for Satoshi but instead as an affinity scammer who is defrauding investors by quietly allowing them to assume he is Satoshi and then redirecting their money to Bitcoin development with no attempt at or interest in forming a profitable business. The best thing that can be said about him is that he is sincere in his love for Bitcoin and has meaningfully supported Bitcoin developers. The second best thing that can be said is that he is primarily defrauding the rich and foolish. By the standards of crypto that probably puts him above average. It does not make him a credible candidate for Satoshi.

The evidence presented in the NYTimes article is not compelling

The New York Times does not present any interesting or new evidence. Saying that Back’s work on public key cryptography implies that he might be Satoshi is like saying that Linus Torvalds might secretly be Bill Gates because they both worked on operating systems. It would only sound credible to someone who didn’t understand anything about technology. It only gets worse from there. Stylometric analysis might as well be a horoscope, especially when the author gave himself as many opportunities as he wanted to adjust and redo the analysis until it gave him an exciting answer. This is just p-hacking for Twitter clicks. It’s embarrassing.

It is wildly irresponsible to accuse someone of being Satoshi

Satoshi, whoever he is, holds (or held at one point) the private key for more than a million bitcoin. He created the most economically subversive technology ever invented. He is a world-class target for governments, criminals and dangerous ideologues. Credibly accusing someone of being Satoshi is quite literally risking their life. Satoshi is at the nexus of so much money and so much power that even speculating about dead people is putting their family and heirs at risk. I am astonished the New York Times even felt it was ethical to publish this piece, let alone credible or newsworthy.

Back has made his entire career about letting people wink-wink-nudge-nudge assume he is Satoshi, so we don’t need to feel bad for him. He’s probably overjoyed about this article. To be honest, I wouldn’t be surprised if the 'slip-of-the-tongue' in the interview was a deliberate attempt to juice his candidacy, although he’s also inarticulate enough that it could just be an honest mistake. It isn’t certainly isn’t evidence for anything interesting.

Satoshi was an absolute master at disguising his identity but we’re supposed to believe he accidentally blurted it out to a New York Times reporter? I can only assume Carreyrou’s next published article will be a hard hitting investigation into how Santa is real and how chemtrails are making the Easter Bunny gay.

Adam Back is not Satoshi

This pile of recycled slop should downgrade your opinion of everyone involved. If Satoshi is still alive he is probably rolled his eyes so hard he briefly saw his own brain. Adam Back is not Satoshi. No one knows who Satoshi is and barring some extraordinary new information surfacing, no one ever will.

That’s a good thing.

This [post about financial nihilism] seems antithetical to my understanding of your view of bitcoin (and gold), but maybe not completely opposed to how you view (or viewed) NFTs? I’m mostly curious how your views on crypto have evolved relative to where all this crypto/prediction market conversation seems to be headed. Other than bitcoin, is there anything “infrastructure-ish” that will remain/be net positive for society? — SL

Thanks for sharing! I would describe Neil Harounian’s post (The Speculation Engine: Financial Nihilism is a Good Thing) as "usefully wrong" — that is, I disagree with it completely but I appreciate how clearly it articulates a worldview I know is both widely and deeply held in the industry. The post isn’t long and it’s a light read, so I encourage anyone reading this to start there.

Inside this issue:

• Fartcoin is not the future of finance

• Crypto, huh! What is it good for?

Fartcoin is not the future of finance

Harounian starts his essay by arguing that the rising gamblification of everything is a healthy and rational response to a "system rigged against the average person". He cites rising home-ownership and undergrad education costs and concludes that "working hard, saving steadily, buying a home and building long-term security no longer feels realistic” which … is quite a leap!

I agree that the cost of home ownership is a genuine crisis — I’ve written about it before. But home ownership is not the only (or even the best) path to financial security and giving up on hard work and saving is not a financial strategy, it is an extremely damaging and pathetic strain of cope. Grown-ass adults need to confront the reality that capitalism is unfair without abandoning responsibility for doing what they can with what they have.

Of course the idea that gambling is smart isn’t really the point of Harounian’s thesis, it’s just a bit of light flattery for his presumed audience: gamblers.1 His real argument is that all this gambling is actually a necessary part of a grand restructuring of the entire financial industry. Just as railroad manias funded the railroads and the dot-com mania built the fiber networks, so too will the crypto manias build a new generation of financial infrastructure, on which we will all eventually depend.2

That kind of argument-by-analogy is at best a little glib. Are we meant to infer that overvaluing Pets.com was a critical step on the path to building nationwide fiber networks? Why? Harounian doesn’t say.

Rather than explain the causal link between speculation and productive investment he takes it for granted and uses it to paint the gamblers of the past (and by implication the present) as heroes and martyrs. But again … why? How does using leverage to long a three-day-old memecoin or buying short-term out-of-the-money Gamestop puts or betting the limit on a six-way-parlay help build the future of finance?

The only example of useful financial infrastructure that Harounian cites are stablecoins — and he is right that stablecoins are a radically transformative technology. But he is wrong to connect the growth of stablecoins to the speculation happening on pump.fun and other DeFi slot machines. Stablecoins are mostly a tool used by the global poor to access dollar-denominated banking services. The crypto casino is a rounding error compared to that market. Retail crypto speculation is not the reason it exists or has grown so quickly.

That’s what makes Harounian’s prediction that "every major GSIB (Global Systemically Important Bank) and Fintech will buy, build or partner with a crypto-native company [by 2035]" unintentionally funny. Stablecoins are the most jaw-droppingly profitable business in the history of the world. Banks have been competing to capture share in that emerging market for more than a decade already. Easy to miss if you are busy speculating on pumpfun memecoins.

Using speculative frenzy as a shorthand for socially useful investment is ridiculous. Labubu sales do not create critical infrastructure. Expensive Pokemon cards do not lower the cost of capital. Fartcoin and BONK do not signify the dawn of a radical new era of financial freedom. Sometimes people just get excited about things and the price of those things goes up.

Crypto, huh! What is it good for?

To get back to your original question, what infrastructure has crypto built that will both endure and be ~net positive for society? In my estimation we have accomplished three things of genuine and enduring value in crypto:

• Bitcoin transforms the nature of long-term saving for the wealthy

• Stablecoins transform the nature of short-term saving for the poor

• NFTs transform the nature of ownership and provenance.

Absolutely everything else in crypto I consider parasitic and destructive to the credibility of these three genuine value propositions. Consider how the speculative frenzies around monkey pictures3 annihilated the public reputation of NFTs — an absolutely wild outcome when you consider that NFTs are functionally a file type. Imagine if one of the early uses of .txt files had been so radioactively unpopular and cringe we had to invent a new naming convention for simple text files.

The casino that has grown on top of crypto is certainly interesting and at times perhaps even fun for some of the people who are playing, but it is very obviously value destructive as a whole. Pretending otherwise is either naive or disingenuous.

In this case I suspect a little of both.

• YouDeserveSome.Art

• There’s no such thing as a real photograph

• The urge to clock, the struggle to pass

YouDeserveSome.Art

Lately I have been writing less, and painting more. There are many differences between painting and writing as a hobby but one important difference is that writing does not take up very much space. Physical art is less practical to accumulate.

So I started a small project called youdeservesome.art to give away the art I am making, hopefully to someone who was excited to get it. If you live near Oakland you should come pick something out. You deserve it.

I wanted a place where I could share pictures of the art I was giving away (and where people could share photos with me of what they did with my art), so I performed the obligatory millennial ritual and created an Instagram account: @youdeservesomeart. This was my first time using Instagram in a little while and I noticed a new toggle in the app that I hadn’t seen before:

Instagram is (like many platforms right now) struggling with a torrent of AI-generated content, much of it unappreciated by Instagram users. I doubt an opt-in content label actually catches the content that people are most bothered by, but it does allow users to opt out of seeing posts with that label. That’s probably good enough to justify the existence of this little toggle, even though I suspect it is rarely used and will be quietly abandoned as soon as Instagram thinks they can get away with abandoning it.

It’s very normal for people to briefly hate new creative technologies and then forget they were ever controversial. Remember when Ratatouille bravely took a stand against motion capture animation?

James Cameron’s Avatar series on the other hand makes extensive use of motion capture animation, but promises not to use generative AI. On the other hand, both Avatar and Ratatouille used pre-recorded soundtracks, something that was once considered controversial by audiences used to live orchestral performances and silent movies. And of course all movies depend on photography, that upstart philistine threat to the sacred art of painting:

This is all healthy and natural. The world changes and people complain about those changes and then change happens anyway. In the meantime, Instagram has a toggle. You can toggle it! But when should you?

There is no such thing as a real photograph

First, and I am not trying to be annoying here, it is very funny to me that Instagram is trying to categorize pictures into "AI" and "not-AI" given that Instagram’s entire business is applying digital filters to smartphone images.

Even if you are a purist who never uses Instagram filters, there is no such thing as a "real" smartphone photograph — they are all digital approximations. The physical sensors in a digital camera can only sense one color. Smartphones use machine learning algorithms to blend multiple monochromatic images together into a single image full of colors the camera was never capable of sensing directly.

So is every digital photograph a form of AI art? I mean, probably not. I don’t think the people who want to filter AI art actually care about machine learning or procedural filters or computational photography. They are angry about generative AI.

But what about the picture at the top of this article, the first photograph I posted to my new account?

This is not an AI generated image, this object physically exists in my front yard. If you stop by and open it up, you will find art inside. It is quite real!

On the other hand, it was made with generative AI. Specifically I used ChatGPT to convert the image of my eldest daughter (originally taken by my wife on an iPhone) into a black and white graffiti stencil. Then I used Adobe Illustrator to fix the hallucinations/errors so that the image actually worked as stencil. I then cut the layers of stencils out of plywood with a laser cutter and used them to spray paint a copy onto each of the side panels. Then I took a photograph of the result (on an Android) and used Instagram to add a nice filter. Is that "made with AI"?

To be honest, I don’t see how it could be reasonable to extend the definition of "made with AI" to "contains anything made with AI." I know a lot about this particular piece of art because I made it myself, but it’s obviously not realistic to expect people to investigate the origin of everything they take a picture of for Instagram. Besides, what if the photographer is criticizing what’s being shown? Should pictures making fun of Willy’s Chocolate Experience be considered "made with AI"?

The photo of the artbox is interesting because it is minimal. Using ChatGPT here was basically a convenience step. It’s completely viable to go directly from digital photograph to Adobe Illustrator and the result would not look particularly different, it just would have taken more time. ChatGPT was a relatively minor contributor to the stencil and the stencil is itself a relatively minor component of the final image. To me, labeling a photo of the artbox "made with AI" is almost as reductive and silly as treating every digital photograph as "made with AI."

Let’s consider some more interesting cases.

The urge to clock, the struggle to pass

I made the woodburn on the left in 2016 and sold it to a smoke shop in Austin. I drew it by hand in pencil and then burned in the design with a pyrography pen. This year I decided to recreate it. I was never completely satisfied with the original jellyfish, so I used Midjourney to design the exact jellyfish I wanted and then used Illustrator to blend the tendrils of that jellyfish into tendrils of smoke. I cut the pieces out with a laser cutter, spray painted them individually and then reassembled them. That’s the middle version. Then I simplified the design to make a small version (on the right) to give away in the youdeservesome.art box.

AI’s contribution here is more substantive. ChatGPT was just a shortcut in creating the stencil, but Midjourney’s jellyfish is nicer than anything I can draw. I authored the composition, chose the materials and colors, drew the figure and simplified the jellyfish to integrate it into the piece — but Midjourney actually drew the jellyfish, and for many people that means the whole piece is creatively 'tainted.'

The logic of taint leads to some funny outcomes, in my opinion. Take this holiday wreath we made this year:

We designed the flowers (and the green leaves) using a set of shape stencils we got from Etsy. I drew the kodama myself. We used Midjourney to design the silver background leaves. They’re definitely important to the design (structurally as well as aesthetically) but it seems strange at best to describe the image on the left as "AI art" just because the image on the right was one of the component ingredients. I think what people mean by AI art is closer to this:

I agree that art like this example is bad but I don’t think being AI generated does a good job of explaining why it is bad. It is bad because it is lazy, schlocky, ugly and boring. Even if someone had painstakingly painted it by hand it would still be schlocky, ugly and boring. Seeing art like this and concluding that AI art is bad is a category error. Bad art is common in every medium and the only thing it does is make good art look good.

People think what they hate about AI art is artifacts, but I don’t find that particularly convincing. People like craquelure and lofi music and tintype photography and glitchcore and impressionism and datamoshing and lots of other forms of artistic expression that leave behind artifacts of how they were made. There is no obligation for new artistic techniques to be undetectable and there is no expectation that art should be a literal mirror of reality. Artifacts have always been part of art.

The idea that artifacts are a problem is just a way to justify the false (but common) belief that you can reliably know when something was made with AI. Take this image for example, posted by Tim Cook to promote the Apple TV show Pluribus:

Cook’s audience reacted with reflexive disdain for "AI art", but the style of this piece is consistent with the style of the artist who signed it, Keith Thomson. The more surreal elements of the piece (like the milk being simultaneously whole and low-fat) are plausibly explained by the plot of the show being promoted. The strangeness of the maze might be a stylistic choice, or it might be caused by content aware fill techniques that have been available in Photoshop since 2010.

Or this could be the output from some kind of generative AI — perhaps he used a model privately trained on his work. Or the public models may have been trained on enough of his previous work that he could create an image like this just by prompting. Unlike my own art, I have no way of knowing how it was made. To be honest, I'm not convinced it really matters. The point of a witch hunt is never really to find witches.

The discourse around AI content reminds me of the trans debate: the urge to clock, the struggle to pass. Transphobes and people who hate AI art are both hyper vigilant against pretenders to an identity they find sacred. Both are trying to anchor a complex and fuzzy reality to a simple, essentialist definition. This is a woman. This is art.

Good luck to them! Essentialists tend to overestimate how easy it will be for people who "know it when they see it" to agree with each other.1 Woman and artist are not simple concepts and will never fit into simple definitions. The only meaningful way to define either category is self-determination. A woman is a person who sees themselves as a woman. An artist is a person who sees themselves as an artist. Art is whatever an artist says it is.

So, what makes something "AI art"? After careful consideration, I believe I have discovered the answer.

• Thank you for your attention

• Front-running the Abyss

• Why doesn’t Bitcoin act more like gold?

Thank you for your attention

On Friday afternoon, U.S. President (and America’s most popular pedophile) Donald Trump announced his intention to raise tariffs on Chinese imports another 100% on top of existing tariffs. Reopening the global war on trade for no particular reason1 surprised the market, knocking roughly 2.7% off the S&P 500, 2% off the Dow Jones and 3.5% off the Nasdaq 100.

Selling a U.S. stock is effectively buying U.S. dollars so normally a large equity sell-off would drive the value of the dollar up. In this case, though, the dollar dropped -0.7%, treasury yields rose,2 and the value of gold rose 1.5%. Investors lost confidence in U.S stocks and the U.S. dollar at the same time.

As with any serious change in economic and foreign policy, Trump made the announcement on his privately owned social media platform, Truth Social:

Trump prefers to make important policy announcements on Truth Social because those announcements are the only reason anyone remembers Truth Social at all. The White House has access to the most powerful media distribution channels in history but Trump prefers to use his F-tier social media site because everyone clicking on his post to understand incredibly important economic policy first has to click through a pop ad like this one (which is real):

This is what America has been reduced to. Matters of state and finance are gated behind interstitial ads for MyPillows and skin parasite creams. Obviously, that makes American policy announcements less dignified and less accessible … but it also gives our already ludicrously wealthy president a fraction of a penny every time someone tries to understand American economic policy. So, y’know. Trade-offs.

Front-running the Abyss

The tariff announcements also sent the crypto markets into a violent tailspin. Bitcoin fell almost 15% from ~$122k/BTC briefly down as low as $102k/BTC, before stabilizing somewhere around ~$112k/BTC at time of writing. The whiplash was worse for the altcoin market, which fell further and recovered less well. Across the entire crypto market ~$19B worth of investor capital was erased. That makes this the largest liquidation event in crypto history — destroying roughly six times as much wealth as the Covid and FTX crashes combined. Not … great?

Don’t worry! It wasn’t bad news for everyone. One lucky trader created a brand new account on a decentralized marketplace called Hyperliquid just in time to open nine figure shorts on BTC and ETH. They even managed to keep opening shorts up to the exact minute before the tariff announcement went public. Another trader was lucky enough to dump their World Liberty Financial Token ($WLFI) an hour before that! World Liberty Financial is the Trump family’s cryptocurrency investment company. Unfortunately there is no way of knowing who could have had a large stash of $WLFI tokens and prior knowledge of Trump’s upcoming tariff announcements.

These are just the trades that were made openly on decentralized markets. Presumably other (smarter) insiders did their insider trading on centralized exchanges where it wouldn’t be so embarrassingly obvious.

Collectively, Hyperliquid users lost ~$1.23B of wealth. More than 1000 wallets were completely liquidated and lost everything. More than 200 wallets lost over $1M. The user with the largest single liquidation lost ~$205M. The insider who traded against them collected only $192M in profit.

Numbers are hard to reason about, so I want to sit with that for a moment.

The median annual salary in America is ~$62k/year, before taxes. The liquidations on Hyperliquid alone destroyed the equivalent of almost 20 million years of ordinary salary. That’s like annihilating the annual income of everyone in New York (the state, not the city). Of course, that’s only the damage done to Hyperliquid traders — a relatively small part of the overall crypto markets, which are themselves tiny compared to traditional financial markets. The actual impact was many, many orders of magnitude larger than what we can measure here.

People die when the markets move like this. Some of them have already committed suicide after watching their net worth be destroyed in an instant. Some will die in the coming months and years because they can no longer afford health care or because they need to take on riskier work to make ends meet. Some will delay retirement, some will give up on getting a college degree. Some will lose their businesses, some will lose their homes. Many, many, many lives were ruined on Friday.

The economy is not a game.

Why doesn’t Bitcoin act more like gold?

A fair question to ask (and one people often ask after flash crashes like this one) is why doesn’t Bitcoin act more like gold? If Bitcoin is the ultimate store-of-value, why did the price of Bitcoin go down when the price of gold went up?

The simple answer is that Bitcoin is not (yet) a store of value. Right now Bitcoin is a proposition bet on whether it will one day become an important store of value. There are a lot of things that could still go wrong with that proposition, so Bitcoin is still a pretty high risk asset. When investors are scared they want to buy safety and sell risk, so when markets crash Bitcoin often crashes with them.

The slightly more complicated (but also more interesting) answer is that safety is a relative term. Compared to the S&P 500 Bitcoin is a risky asset, but compared to the long tail of altcoins it is a conservative investment. Traditional investors sell Bitcoin when they get nervous, but when crypto gamblers get nervous they sell their altcoins and buy Bitcoin instead. That’s why Bitcoin’s share of the overall crypto market cap (aka Bitcoin dominance) rose in the aftermath of the crash even as the price was dropping. Crypto investors were fleeing to the (relative) safety of Bitcoin.

Bitcoin acts simultaneously as a high-risk asset (for traditional investors) and a safe haven asset (for crypto investors).

Even some investors who consider Bitcoin a desirable safe haven asset may have been forced sellers on Friday. Bitcoin is an exceptionally deep and flexible source of liquidity and market crashes are when emergency liquidity is needed — whether to shore up positions or to take advantage of buying opportunities or whatever else. Bitcoin is emergency cash, so it’s not surprising to see people use (i.e. sell) Bitcoin during emergencies. Sometimes selling is actually spending.

Counterintuitively, I think this event was probably bullish for Bitcoin in the medium term and I think price will recover quickly and continue climbing from here. Normally a market is a mix of gamblers, momentum traders and believers, but the whiplash of liquidations wiped out all the gamblers and momentum traders in an instant. The only ones left holding Bitcoin are those who think it is worth more than the current price and can’t be easily scared out of their position. If they didn’t sell on Friday, they probably aren’t selling anytime soon.3

Traditional investors just saw Bitcoin survive a major market stress test and probably updated their assumptions about the natural “floor” price for bitcoin. Crypto investors just watched altcoin markets get torched and probably updated their assumptions about how much bitcoin they should own. Anyone who emptied their bitcoin stash for emergency liquidity will probably want to restock for future emergencies — and anyone else who noticed the value of that liquidity may decide to start acquiring an emergency bitcoin stash of their own.

The fact that Bitcoin just weathered a market-wide panic without ever falling below $100,000 is significant and frankly kind of astonishing. $100k/BTC is now a battle-tested floor price that the market will remember. That’s a sentence I could not have imagined writing when I started Something Interesting in 2020.

I present these predictions to you with total and immaculate confidence, because predicting the future is both easy and fun. However to still keep things entertaining for you (the reader) I have mixed in some bad and inaccurate predictions which will not come true.

It will eventually be obvious which are which.

The Gilded Age of Silicon Railroads

Artificial Intelligence1 as it stands today is already transformative and the technology will continue experience leaps in sophistication for the foreseeable future. The companies investing in frontier models based on widely available data are pointlessly burning money as frontier models will quickly be commoditized by open-source weights of equal or better value.

Raw compute power has already started to hit diminishing returns and will soon sink below the threshold of profitability. Model improvements will continue but they will be driven by governments either as a public good or for military use. Like video game graphics, audio quality, commercial plane speed and the height of skyscrapers commercial AI model complexity will be constrained by market demand more than technological limits.

AGI will be a rolling disappointment that is eventually abandoned while application-specific AI continues to revolutionize our world. General purpose chatbots will devolve into a business model similar to email: offered for free as a loss-leader or to improve retention for a companion product. The real economic potential (and most of the profit) in AI will come from fine-tuning models and designing (or reaching) the right interfaces for specific use cases (chemical/pharmaceutical research, financial markets, childhood education, etc) using a combination of proprietary datasets and deep expertise in the problem space.

Many, many people will go bankrupt in this process — either by guessing wrong about what will happen or by being too early. The enormous capital losses will be held up as evidence that AI is failing and/or was a failure. This will be a mistake — the failed AI businesses leave behind real capital infrastructure in the form of data centers, trained models and upgraded power grids. AI will make the world richer even as many individual businesses fail. Like the tycoons of the Gilded Era the real wealth will come not from building railroads, but be built on top of railroads that others went bankrupt to build.

AI energy use will allow countries to (for a time) translate energy directly into economic value, meaning geopolitical strength will be magnified by the availability of low-cost electricity to cheaply train and operate models at scale. China and its over-provisioned solar and nuclear power will have a head start but eventually everyone will pivot towards making as much energy as they possibly can, leading to an energy production arms race. Solar, nuclear, geothermic, tidal and ocean-thermal power production will all grow rapidly in the coming decades.

AI water use is negligible, but AI energy use is real and will rapidly dwarf any energy use by Bitcoin (or any other industry) in the short to medium term, until model training gains are fully exhausted. AI energy use will be massive but location agnostic, competing with traditional energy use in the short term but subsidizing renewable energy development in the medium to long term. Eventually AI will be understood to have been good for the environment but the transition will involve spiking energy prices and social unrest.

The primary use case for true frontier models will be military use. AI will be the dominant military technology of the 21st century. This will manifest first in tactical environments (piloting drones, enemy detection, threat evasion, etc) but it will inexorably move up the value chain to more strategic decisions before eventually becoming the highest non-civilian military authority. The conflict that unfolds as these technologies are developed and mastered will not be world-ending but it will be widespread enough to be considered WWIII.

Once diminishing returns have been reached for model intelligence compared to other military advantages the world’s powers will stalemate and AI will mostly be used to reinforce that equilibrium rather than disrupt it. Governments in the new equilibrium will be more totalitarian, as greater control and surveillance will be possible with AI and AI will make it easier to turn greater control and surveillance into useful value. Social credit scores, ubiquitous cameras and AI algorithms make a perfect digital panopticon.

Commercially the biggest changes will come not from model improvements but from data harvesting. More datasets will be online and available (for a price). This will have the same effect on retail markets that high-frequency trading has on stock liquidity – prices will be more responsive and more tightly correlated. Advertising will shift from demographic targeting to individual targeting. The value of advertising will go up, increasing its ubiquity. AI will dynamically adapt every surface, feed and piece of content to maximize the resale value of any attention it captures.

The dominance and ubiquity of hostile algorithms will give rise to personally operated open-source models running cheaply on private devices. Personal AIs will move control of information and attention away from central authorities competing for raw engagement and towards individual users optimizing for a variety of individual preferences. Diffusing attention across a wider distribution of algorithms will make it harder for ‘viral’ content to simultaneously hijack everyone’s collective attention and drive the discourse. Today’s era will, in retrospect, be seen as the high-water mark for collective social-media induced psychosis.

The cognito-hazards of generative AI will be different and also more severe. Those who are able to master the tools will have previously unheard of access to knowledge, training and education. Those who are unable to master the tools will be mastered by them and will essentially become a vassal resource managed by whoever controls the AI they are subordinate to. Romantic relationships with AI will be both commonplace and widely regarded as dangerous and bad. LLM psychosis will be considered a legitimate class of mental conditions.

The share of the population that becomes ‘captured’ by AI will remain on ‘raw’ corporate feeds — but the rest of the population will increasingly see corporate feeds as inherently toxic and move to replace them with smaller, better aligned alternatives. As users wrest back control of their attention, society will collectively wrest control of its attention back from the lowest common denominator. This process will happen at the rate of generational turnover, over decades.

AI will make lying effortless and cheap, giving rise to a golden age of misinformation and fraud. Chains-of-trust will replace objective truth signals, all forms of evidence will be reduced to trusted witnesses. Digital media will be cryptographically signed by the device of origin and anyone else seeking to ratify its authenticity. The arms race between fraudsters and fraud prevention protocols will accelerate. Fraud will become both more commonplace and more severe and will be used to justify greater levels of government financial surveillance and control. That will curtail financial freedom but it won’t meaningfully reduce fraud.

Popular art will take increasing advantage of AI. Some creators will make a point of eschewing AI tools at first, but that sector of the market will rapidly become niche as audiences and artists adapt. The stigma around AI use in art will fade the same way the controversy has faded from photography, music sampling and digital art. Artificial artists like Hatsune Miku or Tilly Norwood will become more common but will never be as popular as actual human artists augmented with AI tools. Purely artificial performers will be used most widely by brands that want a spokes-entity that never ages, causes a scandal or tries to negotiate its contract.

Generally any art that does not retain a connection to its creator (i.e. commercial art) will be replaced by AI wielded by the client who commissioned it. AI will be able to produce art more cheaply and more tightly aligned with customer preferences than a human artist ever could. Corporate art/design and commercial acting/modelling are all likely to disappear as viable professions. Making a living as an artist or performer will become synonymous with cultivating an audience.

As that happens, art and culture will diverge into two partially overlapping domains: an ever growing pool of private art perfectly attuned to you and your loved ones and a narrowing public sphere dominated by a handful of multimedia mega-artists using spectacle and cults of personality to capture the widest possible audience. These two categories of art will intersect and orbit each other. Celebrities will engage parasocially with private stories and encourage communal participation in public spectacle. The boundaries between genres, media and individual works will blur. Art and culture will become both more participatory and more performative.

All this I have foretold

I cannot emphasize enough how precise and accurate these predictions are, except for the ones which are not. Any seeming inaccuracies are the result of flawed interpretation. Those portions of the text were understood by more sophisticated readers to be sarcastic.

America is for Immigrants

A recurring (and embarrassing) pattern in American public discourse — on both sides of the aisle — is to treat the welcoming of immigrants to America as a moral duty or an act of charity. I find that line of discourse incredibly frustrating and completely wrong. Immigration policy isn’t (and shouldn’t be) a matter of charity.

There is no moral obligation to provide a path for others to immigrate in the same way that there is no moral obligation to hire anyone into your company or to welcome anyone into your friend group.

But that also doesn’t matter, because you don’t need a moral obligation to justify immigration just as you don’t need a moral obligation to justify hiring coworkers or having friends. Immigration justifies itself. Immigrants make America safer, richer and more powerful. Seeking to shut off the flow of immigrants into America is either innumerate, anti-American or both. Let’s talk about why.

Immigrants make good citizens

An important difference between immigrants and Americans who were born in America is that immigrants chose to be here. That’s why immigrants consistently outperform native citizens in measures of patriotism. Immigrants love America! Immigrating is difficult and sometimes dangerous and people who value American ideals are much more likely to put in the effort. Immigrants are also more likely to start a business, for more or less the same reason: anyone smart and hardworking enough to immigrate for a better life, is more likely to be smart and hardworking enough to start a business for a better life.

I don’t just mean laundromats and gas stations — although immigrants are almost twice as likely as native citizens to start a small business. Immigrants are also a critical resource for larger companies. The current CEOs for Microsoft (Satya Nadella), Alphabet (Sundar Pichai), NVidia (Jensen Huang), AMD (Lisa Su) and FedEx (Raj Subramaniam) are all immigrants. Elon Musk and Sergey Brin are first generation immigrants. Jeff Bezos and Steve Jobs are second generation immigrants.

Less wealthy immigrants benefit the economy, too. Undocumented laborers are a critical part of America’s agricultural and food economies. Without them our food would be less available, less diverse, more expensive and not as fresh. Opposing immigration is like opposing affordable fresh food.

Immigrants also make up a huge portion of the construction labor work force. Without them our nation would build less, more slowly and at greater cost. Opposing immigration is like opposing affordable homes and safe bridges.

But not only are immigrants patriotic neighbors who help grow the economy, feed our community and build our public infrastructure — they also make our communities safer. Immigrants are less likely than native citizens to commit crimes in every major category of crime. Legal immigrants commit less crime than native citizens and undocumented immigrants commit even less crime than that, probably because the consequences of being caught are more severe. First generation immigrants are also less criminal than second generation immigrants, for more-or-less the same reason second generation immigrants have American accents. Immigrants don’t bring crime to America, America teaches the children of immigrants to commit crimes.

Everyone who opposes immigration on the basis of crime is either pro-crime or they can’t read a graph. Those are the only two options.

Immigration is critical to national security

America’s fertility rate (like most of the developed world) has been on a steep and sustained decline for many decades. According to the CDC it fell to a record low of 1.6 in 2024 — well below the 2.1 replacement rate. Left to its own devices, America’s population would be stagnating now and would soon be shrinking. It is immigration that has kept the birth rate from becoming a population crisis:

It’s not just that immigrants keep our total population high — they are also in their prime working years. That means they power the economy and contribute resources in the form of labor and taxes,1 but it also means they put less strain on the government programs which tend on average to direct resources towards children and the elderly. With no immigration and a falling birth rate, America’s population would age and we would face rising demand for government services funded by constantly dwindling tax revenue.

Immigration mitigates and postpones the birth rate crisis — at least for us. If another country takes the lead on welcoming the world’s ambitious migrants then they will have eased their population crisis, but made ours much worse. Opposing immigration is like opposing Medicare and Social Security.

But immigrants don’t just represent prime working years — they are some of the world’s best and brightest. America’s top-tier universities, global corporations and elite cultural institutions attract the world’s most talented researchers, entrepreneurs, industrialists and entertainers. America leads the world in scientific, financial and cultural output and immigrants (specifically through H1B, O1 and student visas) are critical component of U.S. global dominance.

The fear that immigrants are competing with native citizens for jobs is exactly backwards. The scarce global resource is not jobs, it’s talent — talent doesn’t consume jobs, it creates them. Immigration is how we claim a larger share of that scarce global resource for ourselves. Opposing high-skill immigration is ceding that global talent pool to our enemies and competitors.

We don’t just recruit immigrants into the economy. Military naturalization has been a part of America’s military since literally the Revolutionary War.2 Immigrants have fought in every major American conflict. Letting immigrants prove their patriotic bona fides by defending our values on the battlefield has made military recruitment easier and allowed us to recruit and empower people who care deeply about American values. To oppose immigration is to diminish our pool of military personnel.

Even beyond direct recruitment immigration is critical in maintaining our capacity for national defense. American agriculture depends on immigration and American national security depends on American agriculture. If a foreign adversary was able to cut off the flow of immigrants to America our farms would collapse and the nation would starve. Weakening domestic agriculture by denying it resources only makes us more dependent on foreign imports. An army marches on its stomach and a nation at war is no different. We cannot defend ourselves if we cannot feed ourselves.

We also cannot defend ourselves if we fall behind in military technology. In an increasingly high-tech world military dominance means managing a global supply chain. Modern militaries need microchips, batteries, rare earth magnets, advanced alloys, precision sensors and drone manufacturing. The specialized facilities and expertise needed to create and combine these components is necessarily global. The markets needed to scale that production is global. There is no way for a nation to simultaneously isolate themselves and maintain global military dominance.

Immigration allows America to recruit experts in any field, to maintain close ties with the nations where specific resources and expertises are abundant and to cultivate a leadership role in coordinating those global supply chains. To understand modern military power projection is to understand the need for immigrant talent.

Anyone who opposes U.S. immigration is either opposed to American global dominance or confused about how that global dominance is achieved.

Immigrants make America better

Immigrants make America safer, richer, more patriotic and more powerful. They lower the costs of food and of housing. They pay taxes and they create jobs. They make our military stronger and our economy better.

You don’t have to be a bleeding heart to support immigration. You just have to be smart enough to understand numbers or read a graph. America is not an ethnicity, it is a set of values. Immigration is not a threat to American culture, it is a core pillar of what makes it great. America is not a barren pantry that we must jealously guard so our children can split the scraps. America is a potluck dinner where everyone who joins makes the banquet larger.

Supporting immigration is not charity. It’s common sense.

Subscribe now

• There once was a village …

• Along came a Grifter

• It’s a big club and you ain’t in it

There once was a village …

There once was a village of only five people: the Idiot, the Coward, the Centrist, the Liberal and the Conservative. When the town needed to make important decisions, they would have a debate and take a vote. Everyone agreed this was the fairest way to make decisions.

The Liberal and the Conservative cared the most, but they usually disagreed with each other so they would often argue. Sometimes the Liberal was able to convince the Conservative, sometimes the Conservative was able to convince the Liberal and sometimes the right answer was obvious to both of them. When that happened, making decisions was easy.

Mostly though, they disagreed. When that happened, they each would try to convince the other villagers of their opinion. The Coward was too afraid to commit to opinions unless they were already held by the majority. The Centrist had some opinions, but was more annoyed by the debate than concerned about making the right decision. The Idiot could be convinced of anything, but only by using terrible arguments that everyone else knew made no sense. The Idiot liked stories more than logic — especially stories that made them feel smart and powerful.

So for a while the town made decisions like this: the Liberal and the Conservative would try to convince each other with good arguments and if that didn’t work they would try to convince the Idiot with bad arguments. Soon it became obvious that it was much easier to convince the Idiot with bad arguments than it was to convince anyone else with good arguments. Eventually both the Liberal and the Conservative stopped bothering to convince each other and focused their efforts exclusively on convincing the Idiot.

Over time that meant more and more decisions were being made by the Idiot. That was alarming to both the Liberal and the Conservative, but it was still easier to convince the Idiot than to argue with each other or convince the Centrist or the Coward to take a stance. And it was balanced, because generally the Idiot was unpredictable — they tended to make mistakes equally in both directions.

Then one day a Grifter moved to town.

Along came a Grifter

The Grifter told everyone that he was a Conservative. The Idiot believed him. The Coward chose not to question it. The Centrist didn’t care. The Conservative knew the Grifter wasn’t really a Conservative, but figured it was useful to have someone who agreed with them even if he wasn’t totally sincere. The Liberal knew something was suspicious, but didn’t know what it meant.

At first this was great for the Conservative. When it was time to make a decision the Grifter (almost) always agreed with the Conservative! The Grifter was also much better at convincing the Idiot, because the Grifter was a skilled liar and all the Idiot’s favorite stories were lies. After that it was easy for the three of them to convince the Coward that there was a clear majority and convince the Centrist that the Liberal was a fringe activist creating unnecessary debate.

But the Grifter wasn’t really Conservative and making the town Conservative wasn’t really his priority. The Grifter only cared about money. So instead of convincing the Idiot to support Conservative decisions, he focused on convincing the Idiot that the Liberal was a dangerous enemy. That was easier for the Grifter and more motivating for the Idiot.

The Conservative knew better. The Liberal and the Conservative disagreed on many things, but they both loved the town and for a long time they had worked together to make it a better place. On the other hand, making the Liberal seem scary made the Idiot really easy to manipulate – so the Conservative bit their tongue. The Coward was too afraid to say anything and the Centrist wasn’t listening.

With no one pushing back on his lies, the Grifter grew bolder. Soon he was telling the Idiot not just that the Liberal was their enemy but that the Conservative was an unreliable ally and perhaps not even a true Conservative at all. Everyone except the Idiot knew neither the Grifter nor the Idiot were actually Conservative – but it didn’t matter. The Grifter had stolen the name 'Conservative' and changed what it meant.

The Grifter’s logic made no sense, but that didn’t matter either because he didn’t need to convince anyone but the Idiot. The Coward was too afraid to challenge anything, the Centrist didn’t notice, and the Liberal and Conservative had fought so bitterly for so long they had forgotten how to work together. Now every decision in town was being made by the Idiot agreeing with the Grifter. The town was neither Liberal nor Conservative. It had become an Idiot Grift.

It’s a big club and you ain’t in it

Everything got worse for everyone (except for the Grifter). The Idiot didn't understand why and the Centrist didn’t care. The Coward knew why but never spoke up. The Liberal and the Conservative blamed each other.

It took the Conservative a long time to realize that they had been grifted, too. Those early policy victories weren’t about a shared vision for the future – they were, in retrospect, bait. The Grifter just wanted to co-opt the Conservative’s reputation to make their bad arguments seem more credible to the Idiot.

It took the Liberal a long time to realize they had been grifted, too. The anger they felt for the Idiot (for neglecting their interests) and the Conservative (for neglecting their principles) was, in retrospect, bait. Blaming the Conservative and the Idiot for the sins of the Grifter just made it easier for the Grifter to paint them as villainous scolds.

The Coward always knew and the Centrist never cared. But the Liberal, the Conservative and the Idiot were all marks. None of them were in on it. None of them were above it. None of them were outside it.

None of them had escaped it.

Subscribe now

• An extremely stable GENIUS bill

• There is no such thing as a dollar

• If it quacks like a bank account …

• America is a club promoter

• Winners love it when a winner-takes-all

• The stable future and what to do about it

An extremely stable GENIUS bill

On July 18th the U.S. became the first major jurisdiction to formalize a regulatory framework for stablecoins, as the Guiding and Establishing National Innovation for US Stablecoins act (or GENIUS act) became law.1

The bill creates a new legal category for payment stablecoins that is distinct from securities or commodities. Qualified stablecoin issuers are required to be federally licensed or state chartered institutions, be 1:1 backed with a combination of U.S. dollars/treasuries and must comply with the Bank Secrecy Act — meaning they need to support court ordered freezing or confiscation of assets. The actual requirements of the legislation are scheduled to roll out starting in November of 2026, with new regulations going live in stages through 2028.

The GENIUS act was relatively non-controversial by modern standards — it passed with a comfortably bipartisan margin of 68-30 in the Senate. Bank legislation is relatively dry compared to other, more lurid news stories so coverage was limited. But to those paying attention, the formalization of stablecoins represents a monumental turning point in the history of the dollar.

I think it is worth your time to understand.

There is no such thing as a dollar

The most useful thing about dollars is that they are interchangeable — the dollars I give you are worth the same as the dollars you give me, and so on. The strangest thing about dollars is that if you look closely they turn out not to be interchangeable at all. You can’t use bank dollars to buy drugs and you can’t use paper dollars to buy a house. You can transform bank dollars into paper dollars (or vice versa) but they aren’t quite the same thing.

There are a lot of different kinds of dollars. Paper money is not the same as Amazon refund credit is not the same as a Paypal balance is not the same as a master account with the Federal Reserve. There are also other assets that we don’t usually think of as dollars, but work in a similar way — any dollar-denominated debt instruments for example (including US Treasuries) are essentially future dollars attached to some counterparty risk.

All of these instruments are basically "dollars" where the scare quotes represent the specific constraints imposed by that particular system. There is no platonic dollar. There are no "real" dollars in the same way there are no "real" inches — dollars are a measurement, not a material. When we talk about the strength of the dollar what we’re really talking about is how much wealth the world is using dollars to measure.

If it quacks like a bank account …

Stablecoins are a new kind of "dollar" — specifically they are a new kind of bank account. You send some "dollars" to the stablecoin bank, the stablecoin bank updates their ledger to credit your account with some number of dollars. Subject to whatever rules the stablecoin bank imposes you can transfer your dollar credits to other accounts within the network or withdraw them to other dollar systems.2

If you strip the word 'stablecoin' out of that description, you’re just describing a traditional bank account. But there are a few reasons people are uncomfortable calling stablecoins bank accounts in spite of the similarities.

First, bank accounts in U.S. banks are insured under FDIC and stablecoins are not (at least today). The reserve requirements and bankruptcy rules in the GENIUS act are designed to protect consumers from insolvency risk, but the government does not directly insure stablecoin accounts. That makes stablecoins both less safe (because stablecoin users are exposed to the credit risk of the issuing bank) and less interchangeable (because credit risks are different for different banks).

Second, opening a bank account in a U.S. bank requires submitting a lot of paperwork and identification material and U.S. banks are subject to strict "know your customer" laws that require banks to track and report on who is sending money to whom using their banking network. In contrast, creating a new stablecoin account only requires doing some anonymous math and stablecoin banks generally know almost nothing about their customers’ identities.3

Third, stablecoins (at least the ones legally codified in the GENIUS act) are not allowed to pay interest, where traditional bank accounts are. Given the low interest rates paid by bank accounts today this may not seem important but it turns out to be a pretty critical detail.

By combining these three things: no FDIC insurance, no interest and no KYC/AML checks, stablecoins act like a "low-powered" bank account, sometimes called a narrow bank. That trade-off isn’t all that exciting for customers who have access to traditional FDIC insured U.S. bank accounts, but there are still an estimated ~1.4 billion unbanked people in the world today. Because stablecoins skip the expensive KYC/AML checks, they can reach customers with much smaller accounts in the economies where customer identification is much harder to do.

Traditional bank accounts are safe but expensive to open. Most of the world’s population simply does not have enough wealth to making opening an account profitable for the bank. A stablecoin address is essentially a cheap, disposable bank account that can be used more flexibly than a traditional account.

Stablecoins are also staggeringly profitable. The largest stablecoin today is Tether, with ~400M users and a market cap of ~$163B.4 That’s still relatively small compared to the estimated ~1.4 billion people still unbanked worldwide, but it’s large enough to make Tether the 7th largest buyer of U.S. Treasuries, just ahead of Canada and just behind the United Kingdom. Tether just reported Q2/2025 profits of ~$4.9 billion, will only ~200 employees.5

Buying billions of dollars worth of treasuries with customer money and keeping all the interest for yourself is an incredible business model. One way to think about stablecoins is that they are a way of renting out U.S. banking services to the global poor, with the profit coming from all the interest you never pay them. From America’s perspective, unlocking billions of dollars of new demand for treasuries lowers the cost of government debt and makes it easier to keep spending.

Calling stablecoins bank accounts raises all sorts of uncomfortable questions about why they don’t have to pay interest or meet onerous surveillance requirements, so is more politically expedient to simply describe them as something wholly new and innovative: an unprecedented new advance in the world of financial technology! But stablecoins are to bank accounts as Ubers are to taxis. The real innovation is regulatory arbitrage.

Stablecoin is a marketing term. They’re just bank accounts.6

America is a club promoter

America spends lots of money and the money America spends is mostly dollars, so it is good for America when lots of people want to use dollars to measure their wealth. When lots of people want present-day dollars they become valuable and it gets easier for America to buy expensive things without taking on debt. When lots of people want future dollars, Treasuries become valuable/interest rates fall and it becomes cheaper for America to take on debt when buying expensive things.

The strength of the dollar is also the source of much of America’s soft power. American sanctions matter mostly because they make it harder for sanctioned nations to get and spend dollars. American banking laws matter because U.S. regulated banks have access to the most (and best) dollars.7

There is a tension to these benefits. When more people use dollars to trade, you can impose stricter requirements on dollar traders, but stricter requirements also increase the risk that people will stop using dollars to trade. When more people use dollars to save, the government can create (and spend) more dollars — but the more dollars the government creates to fund spending, the greater the risk people will stop using dollars to save.

The American dollar is like an exclusive club where America sets the dress code and the price of entry. That’s a lot of power — but to maintain that power the club needs to stay desirable. It needs to offer the services people expect at a price they find reasonable, otherwise they’ll leave and a new club will become popular instead. As of 2022 roughly ~40-75% of all U.S. dollars were held outside the U.S. — so Americans might own the club, but most of its members are global.

Stablecoins are a way of welcoming a new and lucrative demographic of people into the dollar club. America relinquishes some of the control it has traditionally demanded over bank accounts in order to coax a new category of wealth into the dollar hegemony — like opening a new section of the dollar club with a relaxed dress code and fewer ID checks.

Winners love it when a winner-takes-all

Another important distinction between stablecoins and traditional U.S. bank accounts is that anyone can transfer dollars between bank accounts but only special banking partners can withdraw stablecoins outside the network. For ordinary people to get their dollars out of a stablecoin network they have to sell them to someone who wants that kind of stablecoin, usually at a discount. That’s why the trading price for stablecoins tends to hang out just below $1 instead of exactly at $1. The spread represents how much people are paying to exit (or enter) the network.

That means that transfers within the stablecoin network are much cheaper than transfers into or out of the stablecoin network. Withdrawing dollars from a stablecoin network is less like transferring dollars between U.S. banks and more like selling dollars for another currency on the ForEx market. It’s expensive and unpredictable, especially at large scale. That encourages people to transact within the network (where it is cheaper) and to join the largest network available (so they can transact cheaply with the most people).

In that sense, stablecoin networks aren’t really competing with individual banks, so much as they are competing with the entire U.S. banking network. Stablecoins are cheaper and more private than traditional bank accounts and over time they will likely acquire a similar degree of consumer trust and the ability to pay interest. That will be good news for stablecoin users and for U.S. dollar dominance — and bad news for traditional retail banks and credit card networks.

Most of the cost of traditional payment networks like SWIFT, VISA or PayPal is managing risk. Stablecoin ledgers undercut that cost by managing risk through cryptography instead of expensive trust brokers. That makes them fundamentally cheaper than traditional networks even without any regulatory arbitrage.

It won’t happen overnight, but on a long enough timeline stablecoins will probably replace traditional bank accounts and payment networks for most retail customers. I’m honestly surprised credit card lobbyists aren’t more concerned.

The more immediate impact of stablecoins will be on weaker currencies. Any country where there is significant informal demand for dollars as an alternative to the local currency is likely to experience a collapse. A stablecoin may seem high-risk when compared to an FDIC insured U.S. bank account, but compared to a rapidly inflating local currency or onerous local banking requirements it may seem like a chance to shed risk and shelter wealth in (relative) safety.

For the weakest currencies (the Nigerian naira, the Lebanese pound, the Venezuelan bolívar, etc) this will accelerate the existing currency collapse / dollarization of the local economies. That will probably be good for the locals who will be able to protect their savings from inflation — but it will weaken many governments’ ability to raise funds or impose capital controls and it will kill some currencies off entirely. The dollar will continue to swallow smaller economies as it grows.

The stable future and what to do about it

I suspect the passage of the GENIUS act means the following things:

• Stablecoins will eventually replace traditional bank accounts / payment networks

• The global dominance of the U.S. Dollar will continue to accelerate8

• Smaller / weaker global currencies are likely to weaken and collapse

• Banking surveillance and KYC / AML regulations will be renegotiated

  • In the short run this will weaken surveillance (as stablecoins use regulatory arbitrage to undercut traditional payment networks)

  • In the long run it will greatly increase surveillance (as America takes advantage of the greater demand for dollar access to impose stricter surveillance and controls)

I don’t know that there is anything obvious we can do to position ourselves for these particular predictions. Apply for a job at Tether? Sell your bolívars? Finish up any financial crimes before the new surveillance regime comes online?9

The safest thing to do is to subscribe to Something Interesting.

Subscribe now

• Buying cheese isn’t strategic unless cheese is part of your strategy

• Don’t shoot your enemies with bullets made of gold

• Maybe the real strategic reserve is the friends we made along the way

Make America Grift Again

In a series of converted limestone caves underneath Missouri the U.S. government maintains the world’s largest strategic reserve of cheese — roughly ~1.4B pounds. There are some government programs that make use of the cheese (food assistance, school lunches, etc) but for the most part the cheese is just a way to store the excess milk the government buys from dairy farmers. The purpose of the program is to give dairy farmers money — the cheese reserve is just a side effect.

In unrelated news, President Trump posted the following to Truth Social on Sunday:

A few hours later he added “obviously, BTC and ETH, as other valuable Cryptocurrencies, will be the heart of the Reserve. I also love Bitcoin and Ethereum!” as an afterthought. The price of Bitcoin soared from ~$85.5k/BTC to ~$95.5k/BTC (around ~11.5%). Those gains proved to be pretty ephemeral — as of writing the price has crashed back down to ~$85k/BTC.

Part of the reason that the price moved so much is because the announcement was on a weekend when traditional markets were closed and the trading book depth was much thinner. Another part of the reason is because some "lucky" trader opened a ~$123M long position at 50x leverage on both BTC and ETH just before the announcement went out.1 Very cool!

In another super cool coincidence the list of assets to be included in the crypto reserve happen to be the top five assets held by South African venture capitalist and Trump administration "Crypto Czar" David Sacks in the Bitwise Crypto ETF. Very strategic!

It is, of course, not legal for the President to use American tax money to buy things from his friends – giving money to the president’s friends normally requires an act of Congress, since Congress has constitutional authority over the budget. Of course, it also doesn’t seem like this administration cares what the law says or what Congress thinks. As a matter of constitutional theory I don’t think the crypto reserve is viable. As a matter of practical reality, I don’t think anyone cares.

ADA and XRP are transparently worthless scams whose only product market fit has been selling to rubes. I’m not going to bother defending that claim. If you are smart enough to read this sentence without moving your lips you are smart enough to figure that out on your own. We would honestly and sincerely be better off holding a strategic reserve of DOGE.

BTC, ETH and SOL are — in some ways — more reasonable assets. I don’t invest (or recommend investing in) Ethereum or Solana, but I do think they are interesting platforms and worth learning about. Intelligent people could have an intelligent discussion about their value and potential and how much exposure an investment portfolio should allocate to each of them.

The thing is … America is not an investing club. The purpose of the federal government is not to buy low and sell high. America should not be creating a strategic reserve of crypto assets for the same reasons it shouldn’t be creating a strategic reserve of Apple stock or luxury watches or Pokémon cards. The government owning a lot of something doesn’t make it strategic.

A strategic reserve of something only makes sense if you (a) might need it (for war) and (b) you can’t easily buy it (during war). So a stockpile of oil or steel could be a reasonable strategic reserve — you need both of them to fight wars and you might not be able to buy enough, especially if you are fighting with the countries that produce them.

A stockpile of bitcoin is not strategic, even if we both agree bitcoin is extremely valuable. The American military has no use for bitcoin and even if it did America already has plenty of domestic bitcoin capacity. We can buy whatever BTC or Bitcoin mining power we need from American companies — if and when we need them. Buying bitcoin today is just a subsidy for people who already own bitcoin. The same is true (in order of increasing shamelessness) for SOL, ETH, ADA and XRP. None of these assets has a strategic purpose.

The argument that people advocating for "strategic reserves" of crypto assets are making goes something like this: the government has a strategic reserve of gold, crypto is the new digital gold, ergo the government should have a strategic reserve of crypto. The problem with this line of reasoning (aside from the fact that most of the crypto assets under discussion are at best digital pyrite) is that the gold owned by the federal government is very much not a strategic reserve.

Gold is not a military asset. You can’t use it to make bullets or tanks. You can sell it, of course, but America does not need to sell things to raise money because America prints the money. Dollars aren’t valuable because there is a pile of yellow rocks in a vault at Fort Knox. Dollars are valuable because they are the currency of choice for the deepest and most liquid capital markets in the world. The pile of yellow rocks at Fort Knox is a historical accident. The only reason we haven’t sold it is because selling that much gold would crush the price and make gold investors unhappy.

Anyone trying to measure the wealth of the American government the same way they would measure the wealth of a company or a household is making a severe category error. The economic power of the American government does not come from the things the American government owns, it comes from the strength of the American economy itself. The government maximizes its own spending power by making its citizens wealthy and then taxing them — not by hoarding expensive objects.

If Bitcoin (or indeed any of those other, stupider assets) takes off, the government doesn’t need to own any to already have exposure! They have a ~20-30% claim on the capital gains made by any U.S. taxpayer. The real Strategic Bitcoin Reserve is all the bitcoin held by Americans and American companies.

Most of the people advocating for the government to buy Bitcoin are not really advocating for a strategic reserve at all — at best they are advocating for a monetary hedge. They are anticipating (or perhaps hoping for) a possible future world where the U.S. dollar is no longer the reserve currency of the world and arguing that we should own stockpiles of any potential successor.

But again, this is a category error. America is not rich because we have a big pile of dollars in the basement. We are rich because we have the best financial markets. If everyone stopped using the dollar we would still be rich. If everyone stopped using our financial markets we would become poor even if we started off with a big pile of whatever money was popular at the time. The wealth of a nation is stored in its economy, not in government vaults.

The purpose of the Strategic Crypto Reserve is not to strengthen America or the U.S. dollar — if anything it weakens both. A strategic reserve of crypto is less like the Strategic Petroleum Reserve (SPR) and more like the caves full of government cheese in Missouri. It’s not a strategic resource. It’s a government handout. But at least when we give handouts to dairy farmers we get some cheese. I’d rather set my tax dollars on fire than use them to prop up the price of XRP.

1

Here is Eric Trump congratulating his father on the "genius" timing of this announcement. Openly bragging about how they are manipulating markets.

• ¿Orange man, Orange coin, qué ves ahí?

• The median change vs the change in the median

¿Orange man, Orange coin, qué ves ahí?

On Nov 5th (the day of the US 2024 election) the price of Bitcoin was ~$68.3k/BTC. In the week following the election the price rocketed up ~36% to a high of ~$93.5k/BTC, well past the previous all time high of ~$74k/BTC. As of writing the price remains comfortably above previous levels at ~$88.7k/BTC.

The most obvious way to interpret this movement is that Trump positioned himself as the crypto-friendly candidate and he won. Trump attended Bitcoin conferences and went to Bitcoin bars. He raised money by selling NFT collections (twice) and a Bitcoin ordinals collection (once). He promised to start a Federal Strategic Bitcoin Reserve and to commute the sentence of Silk Road founder Ross Ulbricht. He criticized the SEC and pledged to make America "the crypto capital of the world."

Kamala Harris, by contrast, offered to "protect cryptocurrency investments" on a list of bullet points called the 'Opportunity Agenda for Black Men.'

So one fairly obvious reason that the price ticked up is that the Biden administration has been pretty openly hostile to the crypto industry and Trump is simply not. Trump doesn’t seem to particularly understand or care about Bitcoin (he sold the Casascius bitcoin he was gifted at the Bitcoin conference just before the election) but he does seem to be perfectly content to ally with the Bitcoin constituency.

I don’t think it’s just Trump though — I also think the election reshaped the political landscape around Bitcoin. Crypto was a relatively small part of the presidential campaign but it was a pretty large part of the campaign for Ohio Senate. Democratic incumbent Sherrod Brown lost the seat in part thanks to heavy campaigning against him by crypto-focused political action committees. Democrats are likely to walk away from this election feeling like they spent expensive political capital fighting the crypto industry and they have relatively little to show for it.

Trump has already pledged to fire SEC Chair and noted hand gesture enthusiast Gary Gensler "on day one" — but it’s not clear that he actually has the authority to do that. The president does have the authority to dismiss the Chair, but Gensler would still remain a commissioner until the end of his five year term on 2026 unless he resigned. Still, even diminishing Gensler’s influence without replacing him would represent significant relief for the crypto industry. I’ve written many times about how Gensler’s SEC has been a disaster for crypto and for America.

Gensler himself gave a speech yesterday in which he awkwardly defended his approach to crypto regulation, describing the industry as less that 0.25% of worldwide capital markets but also as "generally between five-and-seven percent of our overall enforcement efforts" which is not a great ratio even before you take into account the relentless court losses and the damage to the reputation of the SEC and to the administration as a whole.

An end to the Gensler era would be good for Bitcoin but it would be even better for DeFi, which is probably why Ethereum (ETH) and Solana (SOL) are up around ~30% and ~40% respectively over the same timeline. Regrettably the price of Dogecoin (DOGE) is up even more, around ~2.5x or so. Presumably this is because Elon Musk likes to manipulate the Dogecoin market and is now the head of a farcical government agency named the Department of Government Efficiency.1

The rising tide hasn’t lifted all boats, though. Many smaller coins and tertiary networks are drying up in a flight to (relative) quality as crypto investors position themselves for the upcoming bull run. Bitcoin dominance (the size of the Bitcoin market cap relative to the size of crypto’s total market cap) has risen to almost 61%, the highest it has been since mid-2021.

I attribute this to a few things: for one, it’s probably more fun to gamble on memecoins in a bear market. In a bear market Bitcoin is boring and memecoins are interesting, but during a bull market Bitcoin provides enough excitement on its own. But I don’t think this is a particularly important part of the explanation, because the majority of the money driving up the price of Bitcoin is actually coming in via the Bitcoin ETFs, not from crypto exchanges. Blackrock’s iShares ETF (IBIT) is the fastest growing ETF in history by an insane margin:

People say this kind of thing a lot, but I do think this bull run will be qualitatively different from previous bull markets. In my opinion most people encounter Bitcoin for the first time during a run up and they don’t buy in because they assume it is a bubble and they missed the moment. Then Bitcoin disappears from their attention for a few years during the bear market and when the next bull run returns they are surprised that Bitcoin hasn’t died or peaked. The second time people hear about Bitcoin they are much more likely to take it seriously.

At this point, almost everyone in the world has heard of Bitcoin. Believing that Bitcoin has value has gone from an extremely fringe position to a relatively commonplace opinion among bankers and CEOs. In the eyes of the public Bitcoin has quietly transitioned from a 'crazy person thing' to a 'rich person thing.' Buying into Bitcoin is also now much simpler — ETFs are a few clicks away in your existing brokerage account as opposed to requiring you to sign up for a new account with a crypto exchange and waiting a few days for KYC/identity verification.

During the last major bull run in 2021 the conventional wisdom was that Bitcoin was a bubble and confident skepticism was a very 'safe' opinion — but over time many of Bitcoin’s most prominent critics damaged their credibility by confidently predicting that Bitcoin would fail. The longer Bitcoin continues to exist and grow the more foolish those predictions start to look — and at this point the 'safe' opinion about Bitcoin is one of uncertainty rather than dismissiveness. That’s an enormous difference, because once you treat Bitcoin as a risky asset rather than an outright scam you have accepted that it has a role in a diversified portfolio.

The Trump administration is also a natural advertisement for Bitcoin’s intended purpose, both as a monetary hedge and as a check on state power. Trump has always chafed at Fed independence — he considered firing Fed Chairman Jay Powell over interest rates during his first term in 2018. That would have been illegal so his staff talked him out of it at the time, but it is unclear what that conflict will look like when it inevitably happens again. At a minimum it seems likely that Trump will pressure Powell to lower interest rates (and by implication mortgage rates) faster. One way or another the money printer will go brrr again.

Other things happening right now:

• As you might imagine, there was a lot of discussion about my post analyzing the results of the presidential election. Some readers argued that my perspective was elitist and out of touch with legitimate voter concerns. To be honest, I haven’t really changed my mind about the median Trump voter. But one thing that did change my perspective was this post about wage growth under Biden. The author argues that although the change in median wages under Biden was positive the median change in wages was not — a subtle but critical distinction in terms of the impact on voters. He also argues that voters are more sensitive to change in income than to change in wages, so voters were likely also reacting to the expiry of COVID era subsidies. Voting for Trump in response to those pressures is still ignorant and self-destructive but at least this evidence suggests it was a response to genuine pain as opposed to entirely manufactured grievances.

Hey KF —

I have a question about what best practices are around succession planning with crypto (in case I die). My wife is a crypto n00b and does not really want to learn. I just want to make sure the funds are not lost if I die and that seed phrases can't get compromised if I'm alive. Are there some good best practices for planning for the worst?

— PA

First, I both recommend and request that you not die. I try to avoid offering explicit financial advice on Something Interesting but I will make an exception here: just don’t die. That will make managing your bitcoin stack radically easier.

Unfortunately, I am aware that in spite of my very good advice many people will choose to die anyway. If mortality is part of your financial plan, here are some things you should consider:

• Don’t leave your loved ones a treasure hunt

• Inheritance is a custody risk

• How to share a secret

• Keep it simple, keep it safe

Don’t leave your loved ones a treasure hunt

Visionary WWII codebreaker, genius mathematician and the grandfather of modern computer science Alan Turing was worried about the possibility of losing his wealth in the event of a German invasion of Britain — so he bought two silver bars (weighing a total of ~90 kg, worth roughly ~$98k today) and buried them a forest near Bletchley Park. After the war when he went to recover the silver he realized he could not break his own code for where it was buried. He never found the silver.

Obviously, everyone reading this post is several standard deviations smarter than the average investor — but none of us are Alan Turing. And even Turing wasn’t smart enough to avoid outsmarting himself! True self custody is a genuinely scary and difficult thing to do. Learning about Bitcoin (including learning to manage and custody bitcoin for yourself) is something everyone should do — but is not something you should force on someone you love, especially during a time of grief.

Don’t send your loved ones on a sidequest. There is no need to be overly clever and there is no upside to making things more complicated. If you bury your private key under a secret tree in Bletchley Park chances are the only legacy you will leave your heirs is a story about lost wealth. Don’t use your estate as an opportunity to flex how creative and interesting you are. Good estate planning should be boring.

Inheritance is a custody risk

People in bitcoin are touchy about how you choose to own and store Bitcoin. As I’ve written about before, I think the ideal custody strategy is a blend of different methods that have different risk profiles. Diversifying the ways you own bitcoin exposure lets you compartmentalize your risks: if something goes wrong, it only compromises part of your wealth rather than your whole stack.

That’s why in my opinion everyone should be doing at least some third-party custody through crypto exchange accounts, Bitcoin ETFs or professional custodians like Casa. That’s a controversial belief to some Bitcoiners, so if it seems counter-intuitive I encourage you to start with the post about the limits of self-custody. I’m not going to rehash those arguments in much detail here.

The reason that the seemingly benign advice to diversify your holding strategies is so controversial is because the history of Bitcoin is full of failed exchanges that lost user money. The risks associated with third-party custody are very real! But people tend to neglect the less-visible-but-no-less-serious risks of loss or theft in self-custody.

If the only thing you worry about is dishonest businesses and corrupt governments, then self-custody with a hardware wallet is the only tool you need. But a more complete picture of risk should include things like losing your seed phrase in a house fire or being targeted by a $5 wrench attack.1 One of the risks people don’t consider enough is the risk of dying unexpectedly and leaving your loved ones no ability to access your wealth without you.

Banks and ETFs excel at managing inheritance risk, so the more you are concerned about inheritance the more heavily you should rely on third-party custody solutions. Inheriting bitcoin held in an account at a crypto exchange or in shares of an ETF is by far the easiest way to posthumously transfer bitcoin wealth. Depending on your age, health and lifestyle you might reasonably decide to reduce your use of self-custody specifically to mitigate the transfer risk for your heirs.

On the other hand, for the same reason that everyone should hold at least some of their stack stored with third-parties for risk diversification, I also think that everyone should custody at least some bitcoin for themselves. So let’s talk about how to plan for inheritance and self custody! It’s the worst kind of Bitcoin inheritance but it is the most fun and exciting.

How to share a secret

To give someone your Bitcoin they need three things

1. They need awareness that your bitcoin exists (and belongs to them)

2. They need access to your private keys

3. They need to know how to use that information

People tend to plan for (2) but underestimate the importance of (1) and (3).

Step 1: Tell someone about your Bitcoin

Bitcoin has no knowledge of your passing and no ability to contact your loved ones. If you want someone to claim your bitcoin after your death, you will need to let them know that yourself. Don’t count on them to search through your laptop files for private keys or to recognize a hardware wallet if they find one in your belongings. That means you should tell someone about your Bitcoin, now, before you die. At a minimum you should tell the executor of your estate.2

You can choose to reveal these things after you die via pre-written or pre-recorded message, but doing that gives you no opportunity to clarify anything and gives your heirs no opportunity to ask any questions. If anything goes wrong with your attempt to sum everything up in one final message there is no Bitcoin support network that can help retrieve your coins. Better to explain something so important with a live conversation than a prewritten monologue.

Step 2: Plan how to store and retrieve your keys

Once you have told your heirs what to expect there really isn’t that much difference between making your private keys accessible to your heirs and making them accessible to your future self. That means most best practices for inheritance are also just best practices for cold storage generally. In my opinion this means:

• Storing your private keys offline in a durable physical medium like metal

• Keeping multiple redundant copies of those keys in case one is lost or damaged

• Re-testing your ability to retrieve coins regularly, every ~year or so

How you choose to secure the keys themselves is a matter of personal judgement, but it is worth remembering that additional security does come at a trade-off for your heirs. Keeping your private key in a safety-deposit box or a home safe might be reasonable, burying it in Bletchley Park is probably not. You should think carefully about what kinds of hurdles your heirs (and future self) will be ready for.

As a simple example, you can choose to encrypt your private keys a secret passphrase. If you store the encrypted keys instead of the bare keys then someone who manages to steal your physical storage still won’t have access to your coin unless they *also* know your secret passphrase. That makes it harder for thieves to steal your coins — but it also adds more places that things can go wrong for your heirs.

Now they need your keys and your passphrase, as well as the knowledge of how to combine them. That’s trickier than it sounds, because they will also need access to the right tools to encrypt/unencrypt the keys and encryption techniques tend to be replaced over time. The tech that was commonplace when you set an address up may or may not still be commonplace by the time your heirs go to retrieve the bitcoin in it.

Step 3: Teach them how to use Bitcoin

Depending on the level of trust you have with your intended heir, this might be as simple as teaching them how you access your own storage. In this case I’m assuming you can trust your wife and the easiest answer is probably just to help her learn how to access your coins the same way you do, while you are around to teach her.3

If you don’t have that level of trust in your intended heir (such as if they are too young to be trusted with that much wealth) consider setting up a tutorial address with a smaller amount of bitcoin but secured in a similar way. You can teach them how to access coins consistently without exposing them to too much temptation and then later you can reveal additional address(es) with larger sums in your estate.

Don’t assume that if you’ve given someone a private key that you have given them bitcoin — if they need to ask someone else for help to actually use a private key you might as well send the key to that person directly. You can only meaningfully transfer bitcoin to someone who knows how to receive it. Otherwise you are just sending your bitcoin to whoever they trust.

Keep it simple, keep it safe

I have deliberately kept things very simple here because I think simplicity is the correct choice when you are optimizing for a loved one who is not a Bitcoin expert. There are theoretically other clever things that you could do with Bitcoin in service of custody and inheritance.

Most obviously, you could store your coins in a multi-signature arrangement where different coalitions of trusted keys could have different permissions over your funds.4 You could use nLockTime to create a kind of crude de-facto trust fund that paid out bitcoin over time, perhaps as a way of preventing your heirs from cashing out and selling everything all at once. You could use nLockTime and multi-signature together to cobble together a dead man’s switch to automatically transfer your bitcoin if you haven’t taken action in a certain amount of time. You could hide the location of your private key in a series of spooky riddles, each more difficult than the last. More things are possible than are actually practical.

If multi-signature storage is something you desire, I recommend working with a professional service like Casa.io. That is expensive, but if you have enough wealth to justify a multi-signature security arrangement you should be able to comfortably afford it. For any other fancy bitcoin machinery, I generally don’t think you should use them at all — at least not with any materially important part of your wealth. These techniques are still too new and experimental to be fully trusted yet. We don’t know all the ways they might go wrong.

Watch for businesses like Casa.io as an indicator of when functionality is stable enough to be trustworthy. The reason that Bitcoin custodians aren’t offering this functionality as a service today is because the security professionals (who are very good at reducing risk) can’t afford the insurance that the actuaries (who are very good at measuring risk) think the business requires. If the professionals don’t think the risk is worth it at commercial scale, it’s definitely not worth attempting for yourself. Separate your desire to do cool and interesting things with Bitcoin from your desire to provide for your loved ones after you are gone. Those are different goals.

I realize I haven’t said anything super groundbreaking here. Store your bitcoin thoughtfully and talk to your loved ones about how you do. Err on the side of simplicity and make sure you check regularly to confirm you (and your heirs) still have the access you expect. Teach your loved ones about Bitcoin while you are still around to answer their questions.

These are humble suggestions, but I also believe that simplicity is the approach that is most likely to ensure your wealth actually reaches your loved ones when the time comes. I promise your heirs will appreciate a straightforward legacy much more than an elaborate one.

• The system works, I guess

• The war for the working class

• Total information collapse

The system works, I guess

For the record, I do not think the point or purpose of democracies is to make good decisions.1 The point and purpose of a democracy is to make widely accepted decisions. Elections aren’t designed to make governments smarter, they are designed to leash them to the will of the people — for better and for worse.

In that sense, the 2020 election (whose results large segments of the population did not accept) was a failure and the 2024 election (whose results are generally undisputed) was a relative success. There will be no insurrection in January. To the extent that democracy is a tool for preventing violent revolution, it is working (for now).

Of course, the damage done to America’s electoral credibility in 2020 has not healed. Now that Trump’s Republican party has demonstrated the political viability of election denialism it will be a permanent fixture of American politics. Politicians of all stripes will learn to reject results they don’t like and election denial will get more sophisticated over time. It remains to be seen how effective those attacks will be in subverting elections and how corrosive they will be on public confidence in democracy — but personally I find it deeply troubling.

For now, only Trumpublicans are actively contesting election results and the 2024 results unambiguously favor Trump, so they probably won’t be contested.2 It would be difficult to overstate how universally the voters chose Trump. Relative to his loss in 2020 Trump’s performance improved all over the country and in almost every demographic. He performed better in urban counties, suburban counties and rural counties. He got more popular with women, Hispanics and independents. He outperformed his 2020 results by 13 points in Uvalde county.

America overwhelmingly and with startling consistency voted to return Trump to a second term as president. So, what does that mean?

The war for the working class

As with any election we are immediately awash in narrative takes about what happened, most extremely shallow. There are recriminations about the Harris campaign itself, of course — should she have gone on Rogan’s podcast? Should she have done more about Gaza? Should she have picked Shapiro as her VP? Should the Democrats have nominated someone else?

I don’t see any convincing evidence backing these criticisms. By all apparent indicators Harris seems to have run an extremely competent campaign. She raised ~3x as much money as Trump did, even without selling sneakers or bibles. Both Harris and Walz ended the campaign with strong and improving favorables. Her policy proposals were popular (when voters didn’t know which party they came from). She performed ~3.6 pts better on average in battleground states than the country overall, suggesting her campaign had a meaningful tactical impact in the places she campaigned the hardest.

Harris’s campaign also outperformed other incumbent parties globally. Incumbents lost elections and/or vote share this year in every single developed country, the first time that has happened in over 100 years of record keeping — basically the entire history of democracy. Against a worldwide rejection of governing parties there is only so much that message discipline and solid ground game can accomplish.

You might also wonder if Trump’s victory is a triumph of white supremacy. There’s no doubt that the Trump campaign leaned heavily on racism, but there is also no denying that Trump’s 2024 coalition was the most multiracial it has ever been. Trump got 55% of the white vote (compare to 58% in 2020 and 57% in 2016) and Harris got 43% (compare to Biden’s 41% or Hillary’s 37%). Trump is a racist with uniquely multiracial appeal. Racism alone does not explain his success.

Another popular theory (articulated here by Bernie Sanders) is that Democrats have abandoned the working class.3 That’s an incredibly strange take! Biden was the most working class president of my lifetime. He secured billions of dollars to support union pensions. He oversaw an economy with the lowest unemployment in decades, strong wage growth and where median household net worth grew by ~37%. He literally walked a picket line! If anything this administration was uniquely sensitive to the needs of working class Americans.

The more accurate — and more interesting — truth is that the working class abandoned the Democrats more than the other way around. The political landscape of 2024 is such that affluent, educated voters support progressive taxation and welfare and low income, low education voters support tax breaks for billionaires. The overarching political question of our time is: why?

Total information collapse

Unfortunately, the simplest and most compelling explanation for why low income and low education voters are voting against their self interest is that they are also low information voters. People with mistaken beliefs about the world were significantly more likely to support Trump.

All the other causal stories about this election flow back into this one. Voters were angry about inflation because grocery and gas prices were easier to understand than wage growth and unemployment rates. They were angry about immigration because it is easier to imagine an foreigner stealing your job and eating your cat than it is to understand immigrant crime rates or the geopolitical leverage America gets from high-skill immigration. They trusted Trump because he was a "business guy" they remember from television.

This is why 2020 election denial is now a litmus test among elected Republicans. Their coalition critically depends on the support of people with low resolution models of the world that are easy to manipulate. They have completely abandoned any attempt to persuade people in favor of

2

If Trumpublican electoral skepticism was sincere the 2024 results would quiet their fears — but it was never sincere, it was always strategic. That’s why Trump and his followers were noisily complaining about election malfeasance right up until it became obvious Trump was winning and then immediately stopped. They don’t actually care about election integrity, they just view it as one of the tools available for seizing power.

For many of my friends and peers (and also many readers) buying a home will be the largest financial decision of their lives. For such an expensive purchase, it’s a surprisingly unexamined one. The desire to own your own home is so widely held that it is almost reflexive. But does it always make sense to buy?

Inside this issue:

• Everyone is born short housing

• Is a home a good investment?

• Let the bank buy it for you

• What does it mean to own property?

• Should you buy a home?

Everyone is born short housing

To a first approximation, everyone reading this newsletter is alive. Congratulations! You have probably already noticed that one of the inconvenient little quirks about being alive is that you need somewhere to do it — ideally somewhere that isn’t full of other people being alive there already. Unfortunately, for a variety of (mostly bad) reasons we haven’t built enough homes in America, so finding somewhere to live is often pretty expensive. According to the Bureau of Labor Statistics (BLS) the typical American household spends ~1/3 of their annual budget on housing — roughly double the next largest category (transportation).

Conventional wisdom is that everyone should aspire to own their own home. The intuitive argument is obvious: renters are spending money, owners are investing in their own home equity. It obviously makes sense to plan such a significant life expense and experience carefully. You have to live somewhere. Does it make more sense to rent your home, or to buy it?

Is a home a good investment?

One part of the standard conventional wisdom that everyone should own their own home is the idea that real estate is a good investment. It is true that on average and over a long timeline property values tend to rise. According to the Federal Housing Finance Agency (FHFA) home prices in America have risen an average of ~4.5% / year since 1992. But that average also includes a five year bear market following the 2008 crash where prices fell as fast as -10.5% / year.1

You also can’t just buy a home in 1992, ignore it for 32 years and then expect to sell it in 2024 for a ~4x markup. Houses require a lot of repair and upkeep costs if you want to actually maintain the market price. Maintaining a property typically costs ~2% of the value of the property annually2 and property tax is approximately ~1%.3

That means the practical return on investment in American real estate over the last few decades has been around ~1.5% annually, with high volatility. By comparison, the S&P 500 returned an average of ~10.7% annually over that same period. Anyone who invested in stocks also didn’t have to list their home for months and pay for a real estate broker when they wanted to sell. In other words, real estate is mostly a terrible investment — at least when viewed in isolation.

It shouldn’t really surprise us that homes are bad investments: things are good investments when they are undervalued. But since most people prefer to own rather than rent it makes sense that the price of ownership is (on average) high. People who assume that owning property is a good financial strategy are either underestimating the true cost of owning property or they are underestimating the opportunity cost of not making other investments, or both.

Let the bank buy it for you

Of course, most people (at least in America) do not buy a house by paying for it all up front. The more typical arrangement is to take out a loan in the form of a mortgage and buy the house with debt. You end up paying more for the property overall but in exchange you pay more slowly. As long as your investments grow faster than the interest on your debt, a mortgage can lower the effective cost of ownership.

Mortgages let you own property without having to sell any of your other investments to pay for it. In other words, a mortgage magnifies your effective wealth by enabling you to "own" more assets than your total net worth. This is basically a form of margin (or leverage) trading, except that banks will offer much better terms for a loan against a house than brokers will offer for loans against a stock.

Banks do not offer mortgages out of generosity. What a bank is buying with a mortgage is greater certainty about the future — which means what banks are selling to you is risk. You get to own the property without having to pay for it — but you have to make all your future mortgage payments or you lose the property entirely. Intuitively, a mortgage reduces the opportunity cost of buying property but adds two new costs: debt interest and foreclosure risk.4

Since most people desire certainty about their future housing, committing to a future and selling that commitment to a bank can be a potentially agreeable tradeoff. A mortgage also typically allows people access to credit at a scale and cost that would be otherwise unavailable to them. Viewed this way you can think of a mortgage as a tool for harnessing future purchasing power in the present, allowing someone to live today in a home they will (eventually) be able to afford.

In a competitive market (which most real estate markets are) most buyers will need to use a mortgage to access their potential future wealth, rather than limiting themselves to buying using only their present wealth. The only other options are (a) buying a cheaper property than your economic peers or (b) waiting until your moment of peak lifetime wealth to make a purchase. For most people, most of the time, a mortgage will be the most practical option.

Banks are also not the only institutions with an interest in cultivating certainty about the future. Governments also usually prefer when citizens make a long term commitment to living in a certain place (and generating a certain amount of property tax revenue). That’s one of the reasons why many governments explicitly subsidize mortgages. In the US the government allows tax-paying households to deduct the interest paid on up to $750k worth of mortgage debt. Assuming you make enough taxable income (and if the bank gave you a mortgage you probably do) that means the first ~$750k worth of mortgage is reduced by whatever your effective tax rate is. You’re not so much paying interest as you are pre-paying taxes.

The existence of the mortgage interest tax break doesn’t make real estate an attractive investment — you are almost certainly better off investing your available wealth in a broad market index rather than levering up on a rapidly depreciating lottery ticket made of lumber and concrete. But the mortgage interest tax break does usually make buying a property with a mortgage more affordable than buying the same property with cash up front.

What does it mean to own property?

As I hope I’ve made clear above, the conventional wisdom that homes are good investments is just mistaken, even after accounting for things like mortgages and the mortgage interest tax break. The true cost of owning a home is a mix of obvious costs (down payment, mortgage payments, property tax) and non-obvious costs (upkeep/repair, foreclosure risk, opportunity cost of capital). The people who think owning a home is a good financial investment are underestimating one or more of the non-obvious costs. Renting is cheaper than buying.

It should not surprise us that renting is cheaper than buying, because buyers are both able to use debt to access their peak lifetime wealth and are heavily subsidized by the government. Renters have neither advantage. It also makes sense when you consider that for any property bought using a mortgage the bank could have bought that property and rented it out themselves instead. The very existence of a mortgage is evidence the bank thinks the buyer will end up paying them more (net risk) than a hypothetical renter would have. In practice most home buyers are paying a premium for the privilege of owning — pretty much the opposite of an ideal investment.

The financial case for owning your own home is extremely weak — but there are other arguments in favor of owning your own home. You might want to own your own property because it gives you greater freedom to customize it or greater emotional satisfaction to know that it belongs to you. You might get pride from maintaining or improving your property or you might view it as a family heirloom. Most importantly, owning your own property guarantees that you have somewhere to live!

More precisely, it grants you the right to live where you are. If you are renting your home the landlord can decide to raise the price, but if you are paying for a mortgage your terms are already locked in. In that sense, the premium you pay for owning a home includes the value of guaranteed access to living in that location. Depending on how you feel about your job/commute, local schools and other aspects of the neighborhood you might place a higher (or lower) premium on guaranteeing long term access. You might also just value stability for its own sake.

The ratio of the cost to rent a property vs own a similar property in a given community is a reflection of the premium that people in that community place on continuing to live there long term. So a college town will probably have higher rent prices and a quiet suburb with good public schools will probably have higher premium on ownership and (relatively) lower rents. In general, the more people want to live somewhere the more expensive it will be — but the longer they want to live there the more expensive buying will be, relative to renting.

This leads to a subtle and under-discussed value to owning your own property: it is a credible signal of both your wealth and your commitment to a particular community. That’s why owning property (especially expensive property) is generally viewed as high status: it can only be done by people who are both rich and have a strong affinity for that specific location. Owning property isn’t an efficient way of generating wealth, it’s an act of conspicuous consumption.

The property values in a neighborhood also tend to rise and fall together, which means people who have anchored their wealth to a home in a community have also anchored their wealth to each other.5 People who own homes on the same street have significantly more shared economic destiny than people who rent. As a result they are natural political allies — the political strength of homeowners is the reason the mortgage tax interest break exists in the first place.

Aligning yourself with the political and economic interests of a wealthy and well organized community might be expensive financially but viewed more holistically might be a very reasonable expense. Owning a home in America is a good rough-and-ready way of making sure the American government is looking out for your interests, especially at the local level. That’s pretty valuable, if you can afford it.

So, should you buy a home?

Maybe? Not as reflexively as conventional wisdom would suggest. I think it makes sense if you are confident in your future income, expect to live in your community for at least the next ten years and don’t mind paying a premium to guarantee stability in your future living situation.

A mortgage does not magically transform rent from an expense into an investment. The people who think renting is spending and owning is saving responsibly are just bad at math. Owning property is more like an expensive way to buy certainty about the future. Reasonable to want! But not something everyone needs.

In "Should you buy a home?" I wrote about how to navigate the tremendous expense of housing as individuals. Here we explore why housing is so expensive and what we should do about that as a society.

Inside this issue:

• The cost of housing is a genuine crisis

• Housing doesn’t have to be expensive

• The unholy alliance of the landed gentry

• Bad ways to solve the housing crisis

• Good ways to solve the housing crisis

The cost of housing is a genuine crisis

In 1985, the median household income in America was ~$22.4k/year and the median home price was ~$78.2k, meaning the median home cost ~3.5 years of work. By 2022 the median household income had risen to ~$74.6k/year — but the price of the median home had risen even faster to ~$433.1k. Buying a home now took ~5.8 years of work.

Here’s what that looked like:

At time of writing the median home price in America is ~4.5x the median annual income, down from the peak a few years ago but still higher than any point since the mid-1950s. I’m mostly focused on America here, but this problem isn’t exclusive or especially specific to America. Housing costs are a significant source of pain for people throughout the western world.

The rising cost of housing is a huge social problem, even for people who can afford that cost for themselves. First and most obviously a lack of affordable housing means more homelessness, poverty and crime. But it also weakens communities in more subtle ways: gentrification drains neighborhoods of vibrancy, longer commutes fill streets with congestion, and essential service providers like teachers, nurses and firefighters are driven out by high prices.

A society where only the rich can afford to live is not a healthy society.

Housing doesn’t have to be expensive

The companion post to this one opens with this observation:

According to the Bureau of Labor Statistics (BLS) the typical American household spends ~1/3 of their annual budget on housing — roughly double the next largest category (transportation).

It is true that housing is the single largest expense of any American household but there is no reason that it has to be. Everyone needs housing to live, but everyone also needs air to live and air isn’t expensive. There is no inherent law of the universe that dictates that precious things have to be expensive.

The reason housing in America has gotten more expensive is because the number of home buyers has been growing faster than the number of homes for sale. That doesn’t happen for most things Americans buy! It would be weird to see a widespread shortage of vehicles, household appliances, televisions, computers, cell phones, or any of the other staples of median American life. We don’t run out of cars, we simply build more cars until people have as many as they want.

It is strange and aberrant that housing does not work the same way. There is plenty of space in America and we are very capable of building cost-efficient housing. We could easily build enough housing to meet rising demand. It’s not impossible to build enough housing for everyone — it’s just not allowed. The housing shortage in America is not inevitable. It is a policy choice.

More housing would lower the cost of housing. The easiest way to see this is to compare different cities in America. There are cities with slow growing / low cost housing, there are cities with slow growing / high cost housing and there are cities with fast growing / low cost housing. There is nowhere in America that has both rapidly growing housing supply and high housing costs. Every single city that decided to build enough housing to meet demand has been successful.

The unholy alliance of the landed gentry

The high cost of housing is a problem with a clear cause (not enough housing) and a clear solution (build more housing). We could solve it. Unfortunately, the challenges of our current housing shortage are not evenly distributed. The rising cost of housing is bad news for people who need to rent property but it is good news for anyone who already owns property.

An unstated but ironclad rule of American politics is that absolutely nothing is allowed to threaten the perceived wealth of the median American voter. ~2/3rds of American homes are owner-occupied and home equity represents ~2/3rds of the median household’s wealth. Whether they (wrongly) believe that wealth to be safely invested or (more accurately) understand home ownership to be a luxury expense doesn’t ultimately matter. All property owners are financially motivated to defend the value of the assets they hold.

Homeowners are one of the largest and most reliable voting blocs in America, particularly at the local levels where most housing policy is set. Politicians are extremely reluctant to anger that constituency, which gives homeowners a de facto veto over any change to housing policy they dislike. The problem with the easy and obvious solution to the housing crisis is that anything that lowers the cost of housing will be unpopular with voters who have ~2/3rds of their net worth tied up in housing.

The median voter in America recognizes that drowning is a problem but worries that building more boats might make their own boat less valuable.

Bad ways to solve the housing crisis

Because the simple and obvious solution to the housing crisis is taboo, our political leaders make empty promises about how they will somehow make housing affordable without making any existing houses cheaper.

Biden for example has proposed giving first time home buyers a ~$10,000 tax credit, but we can’t make housing affordable by spending more money on homes. Home prices are not high because of a shortage of money. Adding more money to the market doesn’t mean more people will end up with homes, it just means more money will be spent on the same outcome. It’s a gift to home owners designed to look like a gift to home buyers. It just makes the cost of housing worse.

Biden has also argued for limiting rent increases, which is even worse. Rent controls lower the quality of rental apartments, decrease the supply, limit mobility and raise the rents on uncontrolled housing in the same market. Rent controls do nothing to help people who need somewhere to live, they just create a strange aristocratic class out of the people who were renting when rent controls were first established — while making things worse for everyone else.

On the opposite side of the aisle, J.D. Vance offered two solutions to the housing crisis in the Vice Presidential debate: deporting immigrants and building new housing on federal land. These are also extremely dumb ideas.

Building houses in the federally owned deserts of the Mountain West would not help address the cost of housing in any American city for the same reason that building houses in Antarctica wouldn’t help address the cost of housing in any American city. The problem is not a shortage of housing in places that nobody wants to live.

Trying to solve the housing crisis by deporting immigrants is both incredibly bleak and incredibly dumb. The total population of undocumented immigrants in America has stayed between ~10-12m since 2005, but during that same time home prices almost doubled. Deporting every undocumented immigrant in America would only reduce the population by ~3.5%, and undocumented immigrants tend to live in smaller houses and with more people so the drop in housing demand would be even smaller than that.

Undocumented immigrants don’t really use very much housing — in fact, they actually build a lot of our housing. We already know that increasing immigration enforcement raises housing prices by creating a supply shock in construction labor. Following through with the threat of mass deportation would actually make housing radically more expensive. It’s not a way to solve the housing crisis. It’s just a way to punish immigrants.

Good ways to solve the housing crisis

Eagle eyed readers will have already figured out the hidden secret to solving the housing crisis: we need to build more homes. In theory that could literally mean the government building more homes directly, but in practice it is probably easier and more effective to just remove the barriers that are keeping the market from building enough homes for itself. The government just needs to get out of the way.

That means less restrictive zoning, eliminating parking minimums, more apartment buildings and fewer single family homes. It means fewer and faster approval processes and less oversight — especially the kind of oversight designed to subtly sabotage building projects in service of existing property owner’s interests. In a perfect world we could go even further — bring back single-room occupancies, eliminate the mortgage interest deduction, tax land value, expand public housing, etc etc.

Sadly, this is not a perfect world — but we can still make progress. Democratic presidential candidate Kamala Harris inherited some of Biden’s misguided policies around demand subsidy and price controls — but she has also proposed subsidizing new housing construction and cutting down on red tape, both approaches that could genuinely help. In general VP Harris has been a lot more honest and direct about the need to actually increase the supply of housing.

Voters (especially at the local levels) set the agenda for housing policy. If you care about housing policy, then you should vote.1 At the national level you should vote for Kamala Harris but it’s even more important to find and vote for the pro-housing candidates in your local elections. Let’s build enough homes for everyone.

If you follow me on Twitter (which I don’t really encourage) you probably already know that I plan to vote for Kamala Harris in the next presidential election, despite my frequent criticism of the current administration. A friend and longtime reader reached out and asked me to explain my reasoning. Here is my best attempt.

Inside this issue:

• How to vote for president (and why you should)

• What a vote for president actually means

• Remember to vote for democracy itself

How to vote for president (and why you should)

In America there are four possible ways to approach the presidential election. You can vote for either of the two major party tickets (either Democratic or Republican), you can vote for a third-party candidate (e.g. RFK Jr) or you can choose not to vote at all.

Regrettably, American presidential elections are decided by the Electoral College rather than the popular vote. As a resident of Oakland my vote won’t be used to decide who the president should be — it will only be used to decide who gets California’s electoral votes. But we already know who will win California — it’s been an uncontested Democratic stronghold for decades. There is ~zero chance that my vote will have any impact on the outcome of the presidential election. Only voters in swing states have a meaningful opportunity to actually choose the president.

That’s why "Didn’t vote!" is consistently a leading political movement in America.

The Electoral College is a bad system but it is naïve to conclude that it means only a handful of votes actually matter. To a first approximation, politicians are herd animals. They are more eager to follow the public than to lead them. To influence the behavior of politicians you have to make your preferences visible. The presidential election is the largest meaningful conversation that American democracy has with itself about what it wants. To participate in that conversation, you have to vote.

In a better world you could vote by simply choosing the candidate that best represents your values and policy preferences — but here again America’s primitive electoral machinery makes that choice a complicated one. Rather than being able to rank candidates in their preferred order American voters have to collapse their preference down to a single choice.

That means voters have to balance how well a candidate represents them with how large a constituency that candidate can appeal to. The perfect candidate for you probably can’t build a winning coalition. The candidate with the best chance of building a winning coalition probably isn’t the perfect candidate for you. The game theory of first-past-the-post voting systems is inexorable: larger coalitions win until you eventually end up with two dominant parties vying for control exclusively with each other.

Third-party candidates in America are either completely irrelevant or spoiler candidates that effectively serve as a symbolic way to "withhold" your vote from whichever major party coalition you would otherwise prefer. From my perspective that’s a fundamentally pyrrhic strategy — it is designed to weaken the political coalition it has the most in common with. Voting for a spoiler candidate is joining a political coalition composed entirely of people who have already rejected larger coalitions. It’s very unlikely to mature into a serious political movement.

There are third party candidates that I think come to represent genuine political values, like Ross Perot and the deficit or Ralph Nader and consumer rights — but I don’t actually think RFK Jr. is one of those candidates. I think he’s just harvesting the chaos of this cycle to pick up stray voters and is pretty openly trying to sell them back to both parties in exchange for a position in their respective administrations. Voting for RFK Jr. doesn’t represent support for any signature issue — unless your signature issue is making sure RFK Jr. has a nice, cushy job next year.

So, like most Americans, I will vote for one of the two major party candidates despite knowing that my vote won’t affect the outcome and that my chosen candidate won’t really represent my political views. As I have written about before, the purpose of democracy is not to make perfect decisions. It is to make imperfect decisions together. Even if your vote never changes the outcome of a single election, voting is still a way of ratifying your ongoing commitment to the machinery of democracy itself. Every vote is a vote for America.

What does a vote for president actually mean?

According to the Pew Research center the top political issues that Americans are concerned about this election cycle:

This isn’t necessarily how I would rank issues by importance, but I don’t get to set the terms of the conversation. America’s political class will interpret the election results as being about these issues — so those are the issues that I have the opportunity to express my opinion on.

Being a single issue voter is only meaningful if your single issue is one that other people are paying attention to. Pivoting my vote on a niche issue (e.g. Bitcoin) would just be voting carelessly — my vote will just end up being interpreted as part of that coalition’s mandate to pursue their preferred policies on the issues listed above. Nobody will pay attention to my esoteric bullshit. The only outcomes that matter in democratic elections are outcomes that involve lots of people at the same time.

So, let’s consider the issues:

1. Inflation / Federal Deficit: I don’t expect either party to reduce money printing by the central banks. As Lyn Alden frequently says: Nothing Stops This Train. Democrats like entitlements and Republicans like tax cuts but nobody is actually serious about trying to reduce debt or balance the budget. Inflation is too complex for ordinary voters to understand, which means it is too complex for ordinary politicians to be honest about. Money printer go brr.

2. Bipartisanship: The Republicans have made refusal to reach across the aisle a signature campaign strategy since Obama. Just a few months ago the Senate Republicans rejected a bipartisan immigration reform bill specifically because Trump thought it would help Biden get re-elected. I don’t think the Democrats are models of co-operative virtue or anything but it’s obvious which party is more interested in bipartisan action.

3. Healthcare: Democrats will praise the Affordable Care Act and Republicans will complain about it but neither has the political will to transform it. Trump has had 8 years to come up with a coherent healthcare policy proposal, it would be foolish to expect him to produce one at this point. Democrats have offered proposals to iterate/improve on the ACA, but Republicans would prefer to keep making insincere promises to dismantle it. I don’t think they have the guts.

4. The Opioid Crisis: This is a genuine American tragedy and I wish it occupied more of our collective attention. I am not satisfied with either party on this issue, but I am especially contemptuous of Trump’s willingness to blame America’s opioid problem on illegal immigrants and asylum seekers. In reality the vast majority of fentanyl is smuggled in by American citizens during legal border crossings. Lying about the opioid crisis to score cheap political points is the opposite of doing anything to solve it.

   

5. Immigration: I straight up do not agree that immigration is a problem. Delegates holding up "Mass Deportation Now" signs at the Republican National Convention make me sick. Anything approaching a policy like that would be economic suicide and moral abomination. America is a country built by immigrants. Immigration makes us strong.

   

6. Gun Violence: The official Republican policy on mass shootings is thoughts and prayers. That’s a complete abdication of responsibility. This is the only country in the world where this happens. It needs to stop.

   

7. Violent Crime: Overall violent crime in America is down significantly and has been since the 90s. The main reason people worry about it is because politicians and the media stoke people’s fears to exploit them. Crime doesn’t strike me as a critical priority this cycle but it does seem like former prosecutor Kamala Harris would probably be tougher on crime than convicted felon Donald Trump.

   

8. Moral Values: I truly cannot fathom the mindset of a person for whom moral virtue is a key priority but who also plans to vote for Trump. The man cheated on his pregnant wife with a porn star. He is notorious for bankruptcies and unpaid bills. He lies so constantly that no one even really notices or treats it like lying anymore. His whole deal is like an explicit rejection of moral virtue.

   

9. K-12 Education: Fun fact! I grew up in Minnesota and most of my family still lives there. I have been a huge fan of Tim Walz’s school lunch program since it launched, well before it reached national attention. Feeding children is a great political litmus test. No just society should ever tolerate hungry children. Investment in public schools in general has tremendously positive effects on society as a whole.
   

10. Terrorism (Domestic & International): During his tenure as president Trump was an unpredictable force on the global stage, which increased global chaos and IMHO did not make America safer from international terrorism. The most serious domestic terrorist threats come from Trump’s base: his supporters literally stormed the Capitol. Harris has no specific experience or relevant history in dealing with terrorism that I know of but Trump has a very well established track record of making the risk of terrorism significantly worse.
    

11. Infrastructure: The Biden/Harris administration passed the Infrastructure and Jobs Act, i.e. the largest infrastructure bill in decades. Trump’s administration invoked the idea of "Infrastructure Week" so many times that it became a running joke but he never actually passed any major infrastructure legislation.
    

12. Racism: Trump began his presidential campaign by calling Mexican immigrants rapists and his recent appearance at the National Association of Black Journalists suggests nothing much has changed. As Biden put it recently: before the Trump presidency, the Ku Klux Klan used to wear hoods.

13. Unemployment: I personally don’t think the president has that much direct influence over the economy, but historically the economy has performed better under Democratic presidents. One thing I do think presidents have quite a bit of authority over is the largest single employer in the economy: the Federal government. During Trump’s presidency there were three government shutdowns, including the longest in American history. That is about as material an impact on unemployment as a president can possibly have.

Remember to vote for democracy itself

A consistent thematic throughline in contemporary American politics is that while I often disagree with Democrats about their preferred policies and solutions, I think they are mostly focused on real problems. The modern Republican party on the other hand (especially the Trump wing of it) seems uniquely fixated on problems that are not real. There was no election fraud. There is no gender crisis. Migrant caravans are not invading America. Violent crime is not destroying our cities. Free school lunches are not communism. Drag queens are not grooming our children.

These manufactured crises are nakedly cynical attempts to manipulate the electorate and even if you agree with the underlying policy goals lying to the voting public is a direct attack on democracy itself. Trump has been very clear about his willingness to undermine democracy when it suits his personal and political interests. He was clear he would not concede the last election and he has been clear that he doesn’t intend to concede the coming election if he loses, either.

The peaceful transfer of power is the hallmark of American democracy and voting for Trump puts that legacy in jeopardy. There is no policy, no legislation, no judicial appointment that is worth risking centuries of American tradition.

Vote for Kamala Harris.

Part III of a three part series on the future of Artificial Intelligence
[Part I: How to think about machines that think]
[Part II: Don’t be afraid of infinite beauty]

This post focuses on how AI tools will change the nature of truth.

Inside this issue:

• Iron bridges and machines that lie

• Toxic mushrooms and medieval frogs

• The Voight-Kampff Captcha

• Where do we go from here?

Iron bridges and machines that lie

In my previous writing about artificial intelligence, I’ve been pretty positive. I’m a believer in the power and potential of AI tools. I’ve written about why I don’t think we should be afraid of AI doom or of AI art or of AI taking everyone’s jobs. I think a lot of the fears that people have about AI are misplaced, so a lot of what I’ve focused on so far has been assuaging misplaced fears. This is not that kind of post.

The greatest danger posed by artificial intelligence is both already happening and largely being ignored: AI makes it cheaper and easier to lie convincingly, but it doesn’t make it cheaper or easier to detect convincing lies. We are fundamentally unprepared for a world where lying is so powerful and so effortless.1

Large-language models like ChatGPT or Claude aren’t actually "smart" in the sense we usually mean. They don’t have internal logic (which is why they often contradict themselves) and they don’t actually know anything about the world (which is why they often hallucinate). What they actually do is use very fancy statistics to decide what word should probably come next in a sequence. LLMs don’t really understand or answer questions — what they actually do is choose a plausible sounding answer, one word at a time.

Plausible sounding (but not necessarily accurate) answers can be useful but unfortunately the most obvious way that plausible sounding (but not necessarily accurate) answers are useful is when you need something to be convincing and you don’t really care if it is true. To a first approximation, LLMs (and AI image generators) are just machines for cheaply producing somewhat convincing lies. That makes them naturally useful for liars, especially unskilled liars or anyone who wants to lie at industrial scale.

AI tools will be used to do incredible things for productivity and art — but first they will be used to lie and lie and lie. That has already been happening for some time: In 2022 Russia released a deepfake video purporting to show Ukranian president Volodymyr Zelensky surrendering and calling for soldiers to lay down arms. In 2023 reckless idiots were using AI to generate (and sell) faulty mushroom foraging guides. Earlier this year a team of criminals used deepfakes to simulate an entire video call full of coworkers (including the CFO) to trick an employee of a Hong Kong financial firm into sending them $25M.

These early attempts to wield AI deceptively are dangerous, but they’re also very primitive. Criminals are still just naively wedging AI into existing scams they already know how to do. AI can make those attacks cheaper and more effective, but that’s only the beginning. Predicting the impact of AI technology by estimating how much it accelerates existing behaviors is like predicting the impact of email by estimating how much it accelerates physical mail. The most dangerous and effective ways to use AI deceptively haven’t been discovered yet.

The marketplace of ideas is a battlefield and AI tools are a brand new class of weapons. We don’t really know yet how to use them in an attack or how to defend against those attacks when they come. Many of our institutions and practices will need to be completely rebuilt to withstand these new forces — and not all of them will survive into this new era.

Toxic mushrooms and medieval frogs

AI tools radically lower the cost of producing text and images. That means productive people will produce more! But it also means unproductive people will produce more, too. A few years ago producing an image of a frog in the style of a medieval manuscript was a lot of effort — so if you found an image of a frog in the style of a medieval manuscript chances were pretty good it actually was from a medieval manuscript. It was always possible to counterfeit medieval frog images, but who would bother? It would be so much pointless effort.

Now of course producing a batch of medieval frog images is as easy as typing /imagine frog in a medieval illuminated manuscript and clicking to re-run the prompt as many times as you want. Until very recently the vast, vast majority of medieval frog art was drawn by medieval artists. But suddenly now the opposite is true. If you search Google for 'medieval manuscript frog' you’re now more likely to encounter AI mimicry than actual medieval art.

This wasn’t malicious. There is no profit in counterfeiting medieval frog art. Most likely the people who created these images weren’t even trying to fool anyone! They were probably just having fun. But it was so much easier for them to make new frogs that it flooded the internet. Researching and understanding real medieval frog art online is now significantly harder — and it may stay that way forever.

Obviously medieval frog art is not the most urgent or pressing issue of our times, but not all misinformation is equally harmless. Amazon has been struggling with AI generated books claiming to be mushroom foraging guides and there are both iOS and Android apps that claim to use AI to identify wild mushrooms. Researches tested three of those applications and found the best performing of the three identified toxic mushrooms ~44% of the time. Not great!

It isn’t just life-or-death information that will suffer, though — there are a deceptively large number of ecosystems that rely on the fact that creating content is high-effort to keep their quality high. Reddit and Wikipedia are both already struggling with the rise of AI generated content — much of which is actually well intentioned!

It used to be the case that if anyone wrote a long, detailed post about an obscure topic you at least knew that they had spent effort on it. That didn’t necessarily ensure quality (obviously) but it did limit the total amount of content that moderators were being asked to review. With LLMs it’s now easier to generate a long, detailed post than it is to read one! We simply have no idea how to go about moderating content in a world where content is infinite.

Online communities like Reddit and Wikipedia aren’t the only ecosystems that depend on scalable moderation. Courts, for example, rely on the effort it takes to file a lawsuit to limit the total number of lawsuits they have to manage. We may need to use AI to be able filter and process all the lawsuits that AI will generate. Or it may get weirder — if AI becomes a popular way to communicate with a lot more people then people will end up with a lot more inbound communication. They may need help from AI to process and respond to all of it!

We may start to ask ourselves tough questions about how closely a person needs to be involved in the construction of a message for it to really be from them. This is already happening on the margins: large OnlyFans accounts employ ghostwriters to respond to all their private messages and cultivate a feeling of intimacy with their customers. I expect they are already (or soon will be) using LLMs to do that even more cheaply and easily. Over time I expect every public figure that wants to cultivate intimacy with an audience to do something similar: celebrities, politicians, corporate brands, etc.

It’s going to get weird! Imagine every presidential candidate running ads asking to join the private group chat where you swap dank memes with Kylie Jenner, the Phillie Phanatic and Taco Bell. Eventually we’re probably going to start getting confused about who the real humans are.

The Voight-Kampff CAPTCHA

A strange little ritual of this moment in history is how you occasionally need to politely reassure a website that you are indeed a real human. If you are one of my natural-intelligence readers you have probably had to do this yourself recently by clicking a checkbox like this one:2

We don’t usually think of them this formally but CAPTCHAs like this are essentially little Turing tests. That’s what the 'T' in CAPTCHA stands for: Completely Automated Public Turing test to tell Computers and Humans Apart. Traditionally they work by asking humans to do something that computers aren’t able to do — but we are rapidly running out of tasks that computers can’t do. It’s quite possible that going forward the only way to be sure someone is human will be to be sure which individual human they actually are. Unfortunately, that’s going to get harder, too.

Traditionally on Reddit you can verify an account by posting a picture of yourself holding a handwritten note with your username. Posting a self-referential photo is a simple way to prove the person in the photo and the person running the account were the same — or at the very least cooperating closely. More formal verification (such as for gambling websites or alcohol delivery) usually involves showing government identification like a driver’s license or a passport. Neither of these strategies will survive the widespread adoption of AI image generators.

It’s not clear whether we will update to even more sophisticated and complex CAPTCHAs or give up on the whole approach and move to something else entirely. What is clear is that the protections we have in place to safeguard trusted actions and information are functionally obsolete. We will need to build something entirely new to replace them.

I honestly have no idea what that might look like.

Where do we go from here?

The world we inhabit today was built on the assumption that content was difficult to create and so treating most content as presumed true was a reasonably effective heuristic. It was quite a bit easier to take a photograph than to fake a photograph, so most photographs were genuine, so it was reasonable to assume any given photograph you saw was genuine. That wasn’t quite as cut-and-dry for writing but the difficulty of writing thoughtful, intelligent text at least meant only thoughtful, intelligent people could do it.

We can’t rely on those assumptions any more. It is now cheaper and easier to ask an AI to hallucinate a photograph than it is to actually take one and soon the majority of photographs will be AI generated rather than taken in the real world. Lies are now cheaper, more convincing and more plentiful than ever before. We will need to assume the images (and video and text, etc) we see are dishonest by default.

Without intervention, photographs and video will collapse to the same evidence value as eyewitness testimony. I strongly expect that cell phones and digital cameras will start cryptographically signing the images they capture and that camera manufacturers will seek to differentiate themselves by making their signing technology difficult to break. That won’t make images trustworthy but it will raise the difficulty of counterfeits, making some scenarios viable again.

We will need similar signature rituals in lots of other places: secret phrases so family can confidently recognize each other when meeting online, much more widespread use of two-factor authentication, a return to high-security interactions taking place in the real world rather than online, etc. We may find a lot of the information resources we took for granted (like Wikipedia) are no longer sustainable.

A world where lies and truth are deeply difficult to distinguish isn’t unprecedented, it’s closer to historically normal. For most of human history knowledge has been difficult to meaningfully separate from myth or rumor. The future of truth may look a lot like a return to the past. The era when it was easier to document the truth than to fabricate it was, in retrospect, quite brief and fragile.

I suspect we will miss it.

• How to domesticate Bitcoin

• How to sell bitcoin to boomers

How to domesticate Bitcoin

Towards the end of February I wrote two posts (Has Bitcoin lost it's soul? and Who will watch the watchmen?) in response to a reader question about whether the rise of Bitcoin ETFs meant Bitcoin had been co-opted by Wall St. The second post was only available to paid subscribers at the time (I’ve taken down all my paywalls since) so if you haven’t had a chance to read it yet I encourage you to check it out.

Since then Bitcoin ETF growth has slowed down. The Blackrock Bitcoin ETF ($IBIT) finished its 71 day streak of inflows (the #10 longest streak of positive flows in ETF history) and the total ETF holdings are stable at ~830k BTC (~4% of all Bitcoin). To be clear, this is still incredible growth: compared to other ETFs after their first 72 days Bitcoin ETFs are the first, second, fourth and eighth largest ever. By any reasonable standards Bitcoin ETFs have been an enormous success — but they do seem to have hit a plateau, at least for now.

In my opinion, the success of Bitcoin ETFs has pretty much cemented Bitcoin’s position as a legally recognized asset in America. Blackrock is the literal embodiment of establishment wealth and influence — Congress isn’t about to outlaw their most successful new line of business. Trying to explicitly ban Bitcoin in America is probably already politically impossible.

But that doesn’t mean the struggle over Bitcoin is over — if anything it’s the opposite. The more it becomes obvious the government can’t kill Bitcoin the more pressure there will be to do something to control it. The argument will move from a debate about whether Bitcoin should exist to a debate about who should be allowed to use it (and how). Critics will stop objecting to crypto as a category and start objecting to "unhosted wallets" and "illegal mixers." They can’t ban Bitcoin entirely anymore but they can still ban privacy and self-custody.

It is still very much possible to imagine a world where Bitcoin is allowed but only for compliant government services like banks. Ben Hunt calls this scenario Bitcoin!™:

In my dystopian vision, Bitcoin isn't banned or criminalized. Pfft. That's a rookie, weak State move. No, I see a future where everyone buys Bitcoin. Where you are encouraged to buy Bitcoin. Where Bitcoin is sold to you morning, noon and night. Where normie economists get on conference calls late at night because they're Bitcoin price-curious.

Except it's not really Bitcoin.

Instead, it’s Bitcoin!™ — a cartoon version of the OG Bitcoin, either a Wall Street-abstracted representation of the price of Bitcoin or a government-painted version of Bitcoin in Dayglo orange. Either way … Bitcoin!™ is trackable and traceable, fully KYC and AML and FBAR and SWIFT and every other US Treasury acronym compliant.

— Ben Hunt, In Praise of Bitcoin

The simplest way to domesticate Bitcoin is to require anyone who uses it directly to participate in the financial surveillance state — and increasingly it seems like that is the approach governments are going to take. The EU just tightened anti-money laundering regulations for cryptocurrency. Last year Senator Warren proposed a bill that would classify every cryptocurrency wallet as a money services business. Earlier this month the SEC sent a Wells Notice to Consensys arguing that their self-custody wallet Metamask is an unregistered broker-dealer.1 The FBI has started arresting developers of privacy tools like Tornado Cash (ETH) and Samourai Wallet (BTC) for crimes like money laundering and unlicensed money transmitting.

Traditionally to be considered a money transmitter (or launderer) you actually have to control the money at some point in the process — but the government is not actually claiming that the Tornado Cash or Samourai Wallet developers ever controlled the money. The Tornado Cash developers were charged for operating the Tornado Cash relayer (a centralized service that coordinated users seeking to exchange privately with each other). The Samourai Wallet developers were charged for actually creating and broadcasting transactions on behalf of users (even though they did not have control of user funds).

The goal here is to make it harder for people to use Bitcoin privately by making it more dangerous for developers to build the tools that make that possible to do — and it’s working. Already Wasabi Wallet (another Bitcoin privacy tool) has started blocking American users and the developers of the Phoenix lightning wallet have announced they are withdrawing from US app stores out of concern that all self-custodial services were under similar legal risk:

This isn’t a side-effect or an accident — it’s the point. That’s why the FBI just released a Public Service Announcement warning that Americans should "avoid cryptocurrency money transmitting services that do not collect know your customer (KYC) information from customers when required" or else they "may encounter financial disruptions during law enforcement actions." Do you know which cryptocurrency businesses are money transmitting services? The FBI recommends you stick with services that don’t offer privacy — just to be safe.

None of this is new — I’ve been writing about financial privacy since the beginning of Something Interesting. But it does seem like things are accelerating — and the stakes are still incredibly high. The modern law enforcement apparatus is built atop a regime of near total financial surveillance — the powers that be will fight to preserve it. The most recent flurry of government action is not the end of that fight. The fight to defend self-custody will never stop, just like the fight to defend encryption from government backdoors will never stop.

It would be naive to assume (as some do) that government pressure will stop at centralized mixers. They are clearly fighting to preserve the levels of visibility and control they have in the traditional financial system. I expect we will soon see proposals to extend KYC/AML reporting responsibilities to hardware wallet manufacturers, hosted node services, liquidity providers on Lightning, sidechain operators and any number of other tools that deliberately or incidentally create privacy for their users. The surveillance state will continue to expand until it is explicitly stopped and the only way to stop it is strong privacy technology.

Today, Bitcoin is a lifeline for the disenfranchised. It is a tool for activists and refugees worldwide. If we don’t develop a strong technological solution to using Bitcoin privately, it won’t make Bitcoin useless — but it will mean it is only useful to the powerful. The battle for Bitcoin is the battle for financial freedom. Don’t get complacent yet!

Other things happening right now:

• Here’s a quick reminder from Jesse Myers of Onramp Bitcoin that Bitcoin is still incredibly small and incredibly early on the scale of global investment:

• If you were wondering how Bitcoin!™ would be advertised to normal mainstream investors the answer is, like this:

As I’ve written before, Bitcoin will never be cheap to use. As that becomes more obvious more people are pinning their hopes on second-layer networks to keep their dream of cheap universal decentralization alive.

Bitcoin Layer 2s are important and valuable but they are also wildly over-marketed. Don’t buy the hype. There is no such thing as a trustless L2.

Inside this issue:

• What is a Bitcoin Layer 2?

• Why would you want an L2?

• There are only three kinds of Bitcoin L2

• How to evaluate an L2 (and why you don’t need to)

What is a Bitcoin Layer 2?

Loosely, a Bitcoin Layer 2 (L2) is a secondary network or protocol built on top of the Bitcoin network. To use an L2 you send some of your bitcoin to an address controlled by the L2, so you have to trust the L2 to keep your bitcoin safe and eventually return them to you. In exchange for that trust you can do things on the L2 that you couldn’t do using the base (or L1) Bitcoin network, like move coins instantly for free or use them as collateral in a smart contract. Using an L2 requires additional trust, but that additional trust allows for greater flexibility.

I say "loosely" because Layer 2 / L2 is a cultural definition, not a technical one. When people argue about the proper definition of L2s what they are really arguing about is what kinds of trust models they find acceptable. You could argue, for example, that Coinbase is functionally an L2: you deposit Bitcoin, use it to trade (or whatever) and then later withdraw.

Custodial systems are not typically what people imagine when they think of L2s but whether we think of them as 'valid' L2s or not they are empirically the largest and most widely used second layer systems built on Bitcoin. Bitcoin ETFs for example hold ~4% of all bitcoin. Another ~1% of all bitcoin are held by wBTC on Ethereum (~160k bitcoin) and BTCB on Binance Smart Chain (~60k bitcoin) — both fully centralized custodians that essentially offer bitcoin escrow services to the Ethereum and BSC economies respectively. By comparison, only ~0.02% (~4.5k bitcoin) are held on the Lightning Network.

A lot of Bitcoiners bristle at calling centralized custodians L2s because you have to trust the custodian. In my opinion they are right to be skeptical of custodians but wrong to turn that skepticism off for other, more complicated L2s. To be useful an L2 needs to be able to do something that the base layer of Bitcoin can’t already do and to do something that Bitcoin can’t do it needs to make new promises that Bitcoin doesn’t already make. New promises mean new categories of trust. People often call something a Bitcoin L2 as a shorthand for 'trustless' when what they really mean is that they trust it. There is no such thing as a trustless Layer 2!

The right mental model for depositing your bitcoin into anything (whether you consider it a Layer 2 or not) is to think of it as buying chips in a casino. You need chips to play the games, but the chips are worthless outside the casino. When you trade bitcoin to buy casino chips, you are trusting the casino not to lose your money, or steal it, or rig the games or abruptly shut down and disappear. Bitcoin is very valuable, so trusting anything with your bitcoin is a very big risk.

Why would you want an L2?

The simplest reason to use an L2 is to save on Bitcoin transaction fees, which are expensive by design. The Lightning Network, for example, lets users set up payment channels where they can settle transactions offline without needing to pay for an expensive update to the main chain. Similarly, Coinbase users can send each other bitcoin instantly for free because Coinbase doesn’t need to pay for a Bitcoin transaction to update its internal account database.

Another potential reason to use an L2 is privacy. Transactions on the base Bitcoin network aren’t just expensive and slow — they are also public forever. Transactions that have been moved off-chain to an L2 don’t leave behind a permanent footprint. Payments within a private Lightning Network channel for example are only visible to the owners of that channel — or you might want to use Blockstream’s Liquid Network because it supports confidential transactions.1

You can also use custodial services for privacy — such as depositing bitcoin into Coinbase from one address and withdrawing to another instead of making a payment directly. Coinbase itself would know those transactions are related — but blockchain analysis firms will have no way of connecting those two addresses. Whether that is a meaningful improvement in privacy will depend on your threat model. It’s not a good way to hide from a government interested in prosecuting you, but it is a pretty effective way to hide from most prying eyes.

The last basic reason to use an L2 to do things with your bitcoin that can’t be done directly on the L1 Bitcoin network. Bitcoin ETFs, for example, let you hold bitcoin in a traditional brokerage account, which is helpful if you want to use bitcoin as a tool for diversifying your portfolio or as part of the collateral for a mortgage. Or the Liquid Network lets you use bitcoin as collateral in smart contracts, which is useful for creating derivative hedge trades or borrowing against your bitcoin anonymously.

There are only three kinds of Bitcoin L2

Custodial L2s (“Trust me”)

Custodial services like Coinbase have a single centralized operator and you are completely vulnerable to them — they can take (or lose) all your money and there is pretty much nothing you can do about it except sue. Custodial L2s are cheap, fast and flexible — but they require trust in the custodian. They are the most convenient and cheap Bitcoin L2s, which means they are also the largest and most liquid.

More importantly, custodial L2s are important because many security models functionally are custodial even if they are advertised as being something else. If the developers of a project have any "emergency powers" like the ability to roll back state in a crisis or unilaterally update the withdrawal rules of the network — the system is custodial. Security guarantees that can be disabled in an emergency are like seatbelts that release if the car decelerates too quickly.

Federated L2s (“Trust us”)

Some Bitcoin L2s are operated by a federation — a committee of independent stakeholders that make decisions by M of N majority vote. In its simplest form a federated L2 is just a multi-signature address: members of the federation "vote" on the legitimacy of a withdrawal transaction by signing it. In more complicated systems (like Fedimint or Liquid) the federation can work together to run an entire parallel network with its own rules and features.

The advantage of a federation over a custodian is that no single member of a federation can betray you — a majority of network operators have to cooperate to change the network rules. That means to trust a federated network you only need a diffuse trust that the majority of network operators are honest, rather than the specific, focused trust you need in the custodian of a custodial network. Federated L2s can do all the same things that custodial L2s can do with potentially less trust.

In the ideal case a federation can be as almost straightforward and efficient as a custodial L2 while being almost as reliable as a fully decentralized system. The catch is that the federation is only meaningfully different from a custodial system if the federation operators are genuinely independent. A federation of many different companies with unique business interests in distant countries is a strong defensive bulwark. A federation of executives from different portfolio companies funded by the same venture capital firm is just a custodian with extra steps.

Decentralized L2s (“Trust this code”)

The rarest (and most commonly advertised) Bitcoin L2s are decentralized networks where there are no central operators, such as the Lightning Network. No central authority means there is no one who can betray or censor the network — in theory. In practice, decentralization is easy to claim, hard to achieve and even harder to evaluate. Decentralizing a system doesn’t make it trust free — it just replaces trust in the system operator with trust in the design and implementation of the system itself.

First that means being able to trust the code — both that it was designed and implemented correctly but also that you have access to the original, unaltered software. More importantly it means trust that the rules the code is designed to enforce are good ones. Designing decentralized trust structures is like making a wish on a cursed monkey’s paw: easy to do badly, REALLY HARD to do well.

To trust a decentralized system is to believe "even the smartest and most ruthless people in the world couldn’t take advantage of these rules." As a general rule, you probably shouldn’t be ready to believe that about very many things! Even if you happen to be one of the smartest and most ruthless people in the world (and you probably are, since you’re a Something Interesting reader) you should still be worried because all the other smart and ruthless attackers still greatly outnumber you and only one of them needs to find a loophole.

The only practical way to know if a decentralized network is secure is to let it grow in value and see whether that value stays secure. The best argument for trusting Bitcoin security isn’t how many experts have reviewed the code — it’s how much value Bitcoin has been able to successfully secure. Bitcoin is running a round-the-clock multibillion dollar bug bounty and no one has claimed the prize — and that’s the only real way to measure decentralized security. Every crypto-economic Bitcoin L2 is by definition both newer and smaller than Bitcoin, which means you should trust their security strictly less — regardless of how they work. They simply aren’t as battle-tested.

How to evaluate an L2 (and why you don’t need to)

Most people today don’t need a Bitcoin Layer 2 at all, unless they happen to already use a custodian for custody/security. To be clear, federated/decentralized Layer 2s are powerful and important — I worked on both at Blockstream! But they are also extremely overhyped, especially to retail users. You don’t need a second layer if your bitcoin is sitting still and unless you are very reckless or very wealthy sitting still is what your bitcoin should probably be doing.

If you are one of the rare people making payments with bitcoin or actively using it as financial collateral, then the efficiency and flexibility of an L2 might be worth the incremental risk — but you should certainly still proceed with caution. Being an early adopter of Bitcoin is both high risk and high reward — but being an early adopter of a Bitcoin L2 is just high risk. You should investigate those risks carefully:

• Who are your counterparties? Who operates the network? Who writes the software?

• How much value has this L2 secured and for how long?

• Are there cheaper / safer / simpler ways to do what you are trying to do?

• Can you do what you are trying to do with less important money?

Bitcoin is an incredible tool for saving and an extremely mediocre tool for spending. The people who insist that everyone should be using it for payments are virtue signaling, not solving a real problem. The right way to use Bitcoin is to put it somewhere safe and leave it alone until you really need it. Use your credit card to buy things — they have much better customer support.2

This post is a practical guide for people who are new to Bitcoin and seeking portfolio exposure or to use the network for themselves for the first time.

If you are curious about Bitcoin but aren’t sure if it makes sense, start here.

If you are actively skeptical about Bitcoin, start here.

In this post:

• Saving is not investing

• The case against investing

• Know your own pain tolerance

• Make a plan (and stick to it)

• Executing your plan

Saving is not investing

Most people today have a tendency to treat saving and investing as synonymous and interchangeable — but that wasn’t always the case. In the era when gold was money no one was confused about the difference. Saving was when you accumulated gold and stored it somewhere safe. Investing was when you spent your gold on something you hoped would give you more gold in the future.

In the era of modern currencies storing your wealth in money is no longer a reasonable thing to do. Even the "strong" currencies still aim for a target inflation rate of ~2%, which means anyone using them to save loses half their purchasing power every ~34 years. Anyone seeking to save now has to find a vehicle that will outpace inflation. U.S. Treasuries are the lowest risk way to do that — but even Treasuries have duration and liquidity limitations that money does not have. Treasuries are lower risk than most investments, but they are still investing because you can’t spend Treasuries directly. You need to sell them for money first.

There are people who use Bitcoin to save (i.e. use it as money) and there are people who use Bitcoin to invest (i.e. they plan to sell it later for money). I think saving with Bitcoin is generally wise and investing with Bitcoin is generally a bad idea. If you use Bitcoin as a way to store some of your wealth until you need it I think Bitcoin will serve you well. If you use Bitcoin as a way to buy low and sell high so you can get more dollars you will very likely regret it — even if you end up with more dollars.

Bitcoin is not an investment. Bitcoin is a nest egg.

The case against investing

Historically, the price of Bitcoin has gone up a lot, so it might seem reasonable to think that the price of Bitcoin usually goes up — but it’s actually the opposite. When the price of Bitcoin does go up it goes up a lot — but what it usually does is go down. The graph above shows how the price of Bitcoin changed each year (in purple) and how it changed if you miss the ten best performing days of that year (in gray).

The experience of owning Bitcoin for the last eleven years has been roughly ~10 days of euphoria a year and ~355 days of watching those gains shrink by ~10.5% per year (before accounting for inflation). Bitcoin’s price action is brutally punishing to anyone who tries to time the market — you can hold bitcoin for 97% of a year when bitcoin’s price doubles and still end up down if you miss the wrong ten days.1

The down days aren’t all gentle, either. Bitcoin has fallen -80% from previous highs at least five times in its history so far. Bitcoin’s price volatility is trending down as the market gets bigger, but it is still much more volatile than other major currencies. That’s why using Bitcoin as a way to buy more dollars is fraught with danger — if you measure the value of your bitcoin savings in USD, the volatility of Bitcoin will constantly be tempting you to sell to protect your dollars.

The people using Bitcoin to save don’t worry about price volatility because they aren’t trying to sell their Bitcoin for more dollars. They are seeking to hold bitcoin, in case they ever need it. They don’t need to pay attention to price movements because the price does not affect how much bitcoin they hold. If anything, a price dip is an opportunity to accumulate more bitcoin cheaply.

To the saver Bitcoin is not volatile at all — everything else is.

Know your own pain tolerance

The most important rule of Bitcoin saving is to never save more in Bitcoin than you can afford to lose. Bitcoin is still very much experimental. There are things that can go wrong and destroy the entire network. Don’t put too many eggs in any one basket — Bitcoin included. You need to plan realistically for the small but non-trivial chance that all the wealth you store in Bitcoin could evaporate overnight.

Bitcoin also is and will remain volatile. Using it to save requires a long enough time horizon to ride out the market cycles and enough discipline to stay committed when the market is moving against you. If you are worried about Bitcoin’s price movements, you probably own too much bitcoin.

You should put a small enough amount of wealth in Bitcoin that you are more worried about being wrong than you are about losing money. That way when the market inevitably crashes you’ll sit still and hope for the best instead of panic selling at the worst possible moment. Making sure you never own more bitcoin than you can afford to completely lose will protect you from that panic.

Know your own personal pain limits and don’t go beyond them. That means not buying more bitcoin than you can risk owning — but it may also mean selling off bitcoin if the price grows faster than your tolerance for risk. Don’t be afraid to move some of your wealth into something less volatile to meet your own personal risk tolerance, and don’t renegotiate your risk tolerance in a bull market. If an abrupt crash would make you fearful, withdraw from your Bitcoin savings until the amount left no longer worries you. Don’t wait for the market to scare you out.

Make a plan (and stick with it)

Once you have established your limits you can start to establish your plan. In my opinion there are two sensible ways to approach saving with bitcoin (we’ll go into both in just a moment) but they both have the same thing in common: you shouldn’t change your plan because of changes in the market.

That doesn’t mean your plan is carved in stone forever — it’s normal for our finances to change when things our life change, for example. It’s also fine to establish a rhythm where you re-examine your strategy every few years to see if your risk tolerance has changed or if your circumstances are different. But if you change your strategy in response to movements in the market you are at enormous risk of overbuying in times of exuberance and overselling in times of despair.

Trying to match your plan to the market environment is just another way of trying to buy low and sell high but with extra steps to make it seem smarter. Timing markets is never a good idea, especially with Bitcoin. Instead, you should choose your saving plan independently of previous market movements and then stick with that plan regardless of how the market moves. Don’t adjust your bungee-jump harness while you’re still bouncing around.

There are two ways to make a plan for saving in bitcoin — you can decide how much bitcoin you want to own or you can decide what percentage of your savings you want to hold in bitcoin. There are advantages and disadvantages to either approach.

Targeting quantity: Bitcoin as wealth insurance

The simplest way to reason about saving with Bitcoin is to decide how much bitcoin you would need to never worry about Bitcoin again. It’s probably less than you think! 21 million seems like a large number but compared to ~8.1 billion people it is very, very small. A little bitcoin goes a surprisingly long way.

When I first started publicly recommending Bitcoin as wealth insurance in 2017 Bitcoin the price of Bitcoin was ~10x lower and there were around ~half a billion fewer people to compete with. Today the same level of "coverage" is more expensive and doesn’t buy as much bitcoin — but it is still relatively cheap. Even $1 worth of bitcoin is enough to buy significant protection. If you own the device you’re reading these words on, you can afford Bitcoin insurance.

The reason wealth insurance through bitcoin is worth considering is because if Bitcoin keeps working as intended, more people will start using it to store their wealth. More people moving their wealth into Bitcoin will cause the value of bitcoin to go up — but it will also cause the value of other assets people use to store wealth (e.g. gold, real estate, equity) to go down. Owning a certain quantity of Bitcoin works as a kind of "wealth insurance" against the possible worlds where Bitcoin absorbs significant value from every other store of wealth.

Quantity targeting is the right answer for anyone who would prefer to ignore bitcoin but is worried that it might be irresponsible. You can just acquire the appropriate quantity of bitcoin for your circumstances and then keep it safe and ready for emergencies, like an earthquake preparedness kit or a first aid kit for a car. Best case scenario you are ready for the emergency if it happens. Worst case scenario you spent an amount of money you can afford buying yourself peace of mind.

Remember that if you are using Bitcoin as wealth insurance that you should not have an exit price in mind. You don’t sell your wealth insurance when the price goes up for the same reason you don’t sell your flood insurance when the rain starts!

Targeting percentage: Bitcoin as a portfolio counterweight

The other slightly more complicated but still valid way to build a Bitcoin savings plan is to keep a certain percentage of your savings in Bitcoin. In this model Bitcoin is not a separate emergency savings cache but is just another component of your overall savings portfolio.

Targeting a percentage requires more attention than targeting a quantity (because you need to periodically rebalance your portfolio) and also more discipline (because staying on plan requires action instead of inaction, especially at volatile moments in the market). But done correctly periodic rebalancing can turn Bitcoin’s biggest disadvantage (volatility) into a significant opportunity.

The traditional argument for owning bitcoin is something like "the gains are so good, you should be willing to tolerate the volatility" — but that is an investor’s mindset, not a saver’s mindset. Anyone buying bitcoin "for the gains" is ultimately trying to time the market. Trying to buy low/sell high is a way of trying to grow USD denominated wealth, not preserve BTC denominated wealth. The argument for saving with Bitcoin runs the opposite direction: you shouldn’t be chasing future bitcoin gains, but bitcoin’s volatility can be incredibly useful.

The price of Bitcoin is largely uncorrelated with other major asset classes: Bitcoin moves to its own rhythms. That means even though Bitcoin is volatile a small share of Bitcoin actually helps to dampen the volatility of your overall portfolio. Bitcoin acts like a counterweight, balancing out the swings in the value of your other assets. A small allocation into bitcoin (along with periodic rebalancing) actually lowers portfolio volatility and improves the risk/reward ratio. 

Even more interesting, Bitcoin’s volatility is positive skew — i.e. the most volatile days in Bitcoin’s history tend to be bullish. This is the same observation we made with the graph at the top of the post about how most of Bitcoin’s yearly gains are clustered in the ten best performing days that year. On most days the price of Bitcoin goes down and on a few days it goes up (a lot).

Most high volatility assets have a negative skew — i.e. they perform well on a 'typical' day but have explosive potential downside risk. The few high volatility, positive skew assets that exist are either naturally illiquid (e.g. Venture Capital) or come with additional risks (e.g. investments in markets with unstable governments). Bitcoin is unique in offering uncorrelated, positive-skew volatility in a highly liquid investment. A small allocation into bitcoin is actually a conservative, risk-minimizing approach. Ignoring Bitcoin’s investment properties is taking on needless portfolio risk. 

Just like using bitcoin for wealth insurance, using bitcoin as a portfolio counterweight means not having an exit price. There is no price at which bitcoin stops being useful for diversifying your portfolio. Anyone with an exit price in mind is implicitly still trying to time the market! That’s not saving.

Executing your plan

Once you have identified your personal limits and your savings goals you can start to actually acquire and hold bitcoin. Theoretically, you can earn Bitcoin in all the same ways you can earn money: working for a bitcoin wage, for example, or selling something for a bitcoin price. In practice however the easiest way to acquire bitcoin is by buying it. There are a few possible ways to do that, each with their own trade-offs.

The biggest distinction in practice is whether you plan to handle the bitcoin you own for yourself (self-custody) or pay a service provider to look after your bitcoin for you. Some Bitcoin purists recoil at the idea of a trusted bitcoin service provider, but reality is a bit more nuanced. Taking custody of your own bitcoin eliminates counterparty risk (i.e. the risk that the exchange steals or loses the money) but it introduces first party risk (i.e. the risk that you lose your money or get robbed or hacked).

In my opinion it is both safer and easier to use a blend of self-custody and trusted service providers — especially when you are just getting started.

How to buy Bitcoin*

The simplest way to start saving with Bitcoin is to buy shares in one of the newly launched Bitcoin ETFs. Shares in a Bitcoin ETF are not actual bitcoin in the same way that shares in an oil ETF are not literally barrels of oil — in both cases what you own is actually a legal claim on an asset sitting in someone else’s control.

That makes ETFs less useful for wealth insurance, because if Bitcoin has become explosively valuable your custodian might be tempted not to honor your IOU when you need it — but it does have some advantages. ETFs are traditional financial assets, so they are listed at traditional brokers and are easy to add to existing retirement accounts. That makes ETFs convenient to use as a portfolio counterweight, since it is easy to rebalance funds between Bitcoin and other assets.

ETFs are also good for people who find the financial case compelling but are intimidated by the risks or learning curve of handling Bitcoin for themselves. You don’t have to worry about losing your password or your laptop getting hacked. ETFs simplify inheritance / estate planning and tax reporting. ETFs do have annual fees, but right now competition has driven them all fairly low. You can buy Bitcoin ETF shares from most standard brokerage accounts — although not with Vanguard.

How to actually buy Bitcoin

The more advanced way to buy bitcoin is on a Bitcoin exchange — a marketplace where users buy and sell bitcoin to each other. Signing up for an exchange is a lot like signing up for a bank account and exchanges would like you to think of them as being like banks — but I think you are better off thinking of them as casinos. Not necessarily dishonest, but definitely not looking out for your best interests.

Technically you can treat the exchange like a bank and leave crypto (or government money) deposited on your account, but I generally don’t recommend it unless you are in the process of buying or selling. Leaving money deposited on an exchange is a bit like giving a free, unsecured loan to the startup that owns the exchange. Unlike ETFs there is no annual fee — but you are taking credit risk against the exchange. Generally I think the ETFs are a better risk, even after accounting for fees.2

The only major advantage that buying bitcoin on an exchange has over Bitcoin ETFs is that you can withdraw it! That makes Bitcoin exchanges the shortest and most convenient path to self-custody today. To really use Bitcoin as wealth insurance you will eventually need to master self-custody, since holding bitcoin yourself is the only way you can be absolutely certain it will be there when the time comes — otherwise your insurance amounts to an IOU from whoever is managing your bitcoin.

How to learn cheaply

Taking control of your own bitcoin means you don’t have to trust anyone else — there is no one else who can confiscate your bitcoin or misplace it. But it also means you have to trust yourself — there is no one else who can restore a lost password for you or get your money back if it is stolen. There is no Bitcoin customer support.

Start small. Don’t try to handle a large amount of bitcoin until you have learned to handle a small amount of bitcoin. Self-custody is something that anyone can learn to do, but it is extremely unforgiving to mistakes. When you are getting started you will likely make mistakes and lose coins. It is better to learn those lessons cheaply with toy amounts than to lose your entire stack.

As the amount you custody for yourself grows you will eventually start wanting to use more sophisticated strategies like cold-storage, hardware wallets and multisig. Just as with basic self-custody you should start with a small amount and get comfortable before doing anything with larger amounts.

Don’t drop the bag

The hardest part about using Bitcoin to save is not getting bitcoin — it is keeping it. Don’t try to increase your stack by gambling on memecoins. Don’t try to increase your stack by day trading. Don’t let crashes scare you away from your plan and don’t let bubbles convince you to put in more than you can afford to risk. Don’t use leverage and don’t try to outsmart the market.

Don’t use Bitcoin to chase dollars. Use it to save your wealth.

A return to new all-time-high prices for Bitcoin means that Bitcoin is once again getting heavy coverage in mainstream financial news — which means that a new cohort of people are learning about Bitcoin for the first time. Below is a quick guide to some of the most common Bitcoin questions along with concise, straightforward answers and resources to learn more.

Sooner than you think people will start asking you how to learn about Bitcoin! When that happens to you, feel free to share this link with them, too.

Inside this issue:

• Should you care about Bitcoin?

• Is Bitcoin good for the world?

• What does it mean to own Bitcoin?

• Should you care about anything else in crypto?

Should you care about Bitcoin?

There was a long while where dismissing or ignoring Bitcoin was a reasonable strategy — but that time has pretty clearly passed. The longer that Bitcoin continues to exist the less realistic it is to assume it will just go away. The world’s most powerful governments and largest corporations have started planning for a future where Bitcoin plays an increasingly important role in the world economy. If Bitcoin really does have a credible chance of changing the nature of money, everyone who cares about money needs to care about Bitcoin. Everyone needs to learn at least a little about Bitcoin for themselves.

Here is a common list of questions people often start with:

1. Does Bitcoin really work?

   Yes, it really does. There really are only 21M Bitcoin and there really is no authority in the world able to print more bitcoin or censor a bitcoin payment.1 There is no one in charge of the network and no secret backdoor in the code. Bitcoin is brand new and it could absolutely still fail. But it has been working for fifteen years and the most serious risk (that adoption would never catch on) has gotten considerably smaller. If you want to learn more about how Bitcoin works I genuinely recommend Satoshi’s original Bitcoin whitepaper — it’s only 8 pages long and it’s very readable. But if you are mainly interested in whether it works, Bitcoin’s history of operation in practice is the most important evidence.
   

2. Why is Bitcoin worth something instead of nothing?

   Bitcoin has value because you can hold it without asking anyone’s permission and you can spend it without anyone being able to stop you. That makes it useful for anyone who has difficulty storing value (e.g. citizens of a country with unstable banks and a weak currency) or anyone who has difficulty sending value (e.g. anyone sending remittances internationally). Bitcoin has value because some people want to use it, to either save or spend their wealth. The more people who want to use Bitcoin, the more valuable Bitcoin is.
   

3. What is Bitcoin "backed" by?

   Bitcoin is not "backed" by anything, because Bitcoin derives its value from other people who want to save or spend their wealth in the Bitcoin network. This is akin to how the U.S. dollar is not "backed" by anything except the shared belief that other people will very likely want those dollars when we want to spend them. Money is a network, not an asset. The ability to "cash out" to some fallback commodity is not an essential feature of money and indeed most modern money does not offer it. Bitcoin is no different in this way.
   

4. Is Bitcoin just a bubble?

   No, bubbles only break once. Bitcoin has survived greater than -80% drops at least five times so far and then gone on to greater highs. That’s obviously extremely volatile but it’s not a bubble in the classic sense because bubbles do not recover after collapsing. Comparisons to tulips or Beanie Babies or the dotcom bubble are all attempts to understand Bitcoin by placing it in a familiar category, but Bitcoin does not behave in a familiar way. That kind of comparison isn’t particularly useful for understanding it.

   

5. Won’t the government just shut it down?

   China has banned Bitcoin mining several times and it’s been unsuccessful — both in the sense that total mining power has continued to grow and in the sense that roughly ~21% of Bitcoin mining still takes place in China. Hypothetically we could imagine America taking a similar stance but it would be an uphill battle constitutionally, since mining is essentially a form of speech and Bitcoin itself is a form of assembly, both of which are First Amendment rights.
   
   More importantly the larger Bitcoin gets and the more intertwined with the rest of the economy and the wealth of its citizens, the more politically dangerous any attempt to ban Bitcoin will become. The conservative case for incorporating a small allocation to Bitcoin into a portfolio is extremely strong and Bitcoin ETF companies like Blackrock and Fidelity will be actively making that case to major corporations and large pension funds. Once companies in the S&P 500 start using Bitcoin that way every passive investor in America will effectively be a Bitcoin investor. The more people who are invested in Bitcoin, the more unlikely it becomes that politicians will try to outlaw Bitcoin.
   
   If governments do want to ban Bitcoin, the clock is ticking.

Is Bitcoin good for the world?

Yes, Bitcoin is complicated but ultimately good for the world. It allows people in Nigeria (and Turkey and Egypt and Lebanon and many others) to save in a currency that isn’t collapsing. It also limits those governments ability to spend their citizens’ wealth through inflation — a stealth tax that weighs most heavily on the poor. Bitcoin allows women in Afghanistan to earn and save money without legal access to a bank account and it allowed war refugees to carry wealth with them as they fled Ukraine. For the people who need it, Bitcoin is a lifeline. It’s a powerful force for human rights.

1. Is Bitcoin mostly used for crime?
   Cryptocurrency forensics firm Chainalysis estimates that only ~0.34% of cryptocurrency transactions were related to crime and ~2/3rds of those illicit transactions were stablecoins. Brian Nelson, the U.S. Treasury Undersecretary for Terrorism and Financial Intelligence testified to Congress that "terrorists still prefer, frankly, to use traditional products and services" over cryptocurrency.
   
   Bitcoin today is mostly used for saving — the average bitcoin hasn’t moved for almost five years.2 Bitcoin is often accused of being a vehicle for crime and terrorism but that’s not actually true in practice. Most crime does not involve cryptocurrency, most cryptocurrency crime does not involve Bitcoin and most Bitcoin transactions do not involve crime.
   
   Bitcoin is like the internet: criminals use it — but it’s not for crime. Bitcoin is for everyone.
   

2. Is Bitcoin bad for the environment?
   No. Bitcoin is a large consumer of energy but probably not as large as you’ve been led to believe and it’s certainly not as much energy as the banking sector uses to provide similar services today. More importantly, Bitcoin is a scavenger of cheap energy. Cheap energy is the energy no one else wants — that’s why it is cheap. Bitcoin is like a dog under the dining table — it might eat a lot of scraps, but it isn’t stealing anyone’s dinner.

   Because Bitcoin mining is very sensitive to energy price but indifferent to time and location it is very adaptable, which makes it uniquely well suited for renewable energy. ~54.5% of Bitcoin mining is emission free, such as the hydropower mining facility in Virunga National Park in the Congo that helps to pay for conservation in the park. Put another way, more than half the revenue of Bitcoin miners is a direct subsidy to renewable energy producers.
   
   Bitcoin mining can also reach isolated sites like the methane flares on distant oil wells which means Bitcoin mining can convert waste methane into useful work and dramatically (~84x) less harmful emissions. Bitcoin is actually one of the only industries capable of being carbon negative.

   
   Bitcoin stabilizes and subsidizes the production of power. It literally makes renewable energy more profitable. Far from creating a risk of energy scarcity, Bitcoin is a tool that can help us achieve energy abundance.

What does it mean to own Bitcoin?

1. Should you own some bitcoin?
   Yes, you almost certainly should. Whether it ends up living up to its intended potential or not, Bitcoin is causing the entire financial world to re-examine the nature of money. Anyone who cares about money should be willing to spend time, effort (and yes, money) to learn about anything that significant to the nature of money itself. It’s worth buying a few dollars worth of Bitcoin just to learn with it. If you don’t own any bitcoin at all, you probably haven’t learned enough about it yet. Historically that’s been a very reasonable approach, but at this point Bitcoin is important enough that everyone should learn about it for themselves. That means everyone should own at least a little bitcoin.
   

2. How much bitcoin should you own?
   Look, I am not a financial advisor and this is not financial advice. But I do think you should sit carefully with this question.
   
   The typical argument for investing in Bitcoin is that you should tolerate its volatility in exchange for its gains — sometimes it crashes, but other times it rockets up! Obviously it is good to own something you think will go up in value.

   
   Perhaps less obvious is the argument that you should be willing to invest in Bitcoin exactly because of its volatility. Bitcoin has uncorrelated, positive-skew volatility — it’s most volatile days tend to be winners and it doesn’t move at the same time or in the same direction as other asset prices. That means even though Bitcoin is volatile, diversifying into a small Bitcoin allocation actually lowers the volatility of an overall investment portfolio.
   
   The case for incorporating a small share of Bitcoin in a larger portfolio is mathematically very strong. Taken at face value the math suggests an optimal allocation of ~3-10%, depending on your risk tolerance. Even after assuming that Bitcoin will lose half its value during the time you are investing the optimal allocation is still ~3%. Bitcoin’s volatility is exceptionally useful.
   
   Another possible approach is to ask how much bitcoin you would need to own to be wealthy in a world where everyone measures wealth in bitcoin. You probably don’t need as much bitcoin as you think to be hedged against a Bitcoin future. The total number of bitcoin (21M) sounds like a lot, but across the ~8.1B people in the world that means there are only ~0.0026 btc per person, ~$189 worth of bitcoin at time of writing. If you own ~$375 worth of bitcoin today then by definition you own more Bitcoin than most people ever will.3
   
   In the real world of course resources are never evenly distributed. If we assume the economy of the Bitcoin future has similar inequality to the global economy today, this chart shows how we might expect bitcoin to be distributed among the bitcoin wealthy. A little bitcoin goes a surprisingly long way.

   

   Whatever strategy you choose when approaching Bitcoin as an investment it is important to be realistic about the volatility and the risks. All markets punish attempts to time the market but Bitcoin’s volatility punishes those attempts especially brutally. Investments in Bitcoin should have a multi-year time horizon and should use dollar cost average to minimize entry/exit risk. Above all else make sure your investment is small enough that you can ride out the inevitable waves of market chaos without fear. Bitcoin has crashed many times so far and it will almost certainly crash violently again in the future. Make sure your investment is small enough that you won’t panic when it does.

Should you care about anything else in crypto?

You might find other things in crypto interesting (I certainly do) but you don’t need to pay attention to anything else in crypto yet the way you need to pay attention to Bitcoin. There are other things being done that have interesting qualities or significant potential but nothing else has achieved escape velocity the way Bitcoin has or is even particularly close.

I think NFTs are fascinating and have enormous potential and I’ve written more about them here and here. I think Ethereum is fascinating but ultimately flawed and I’ve written about it here and here. I personally don’t think memecoins are all that interesting but I’ve written about them a few times as well if you are curious.

If you want to learn more about the space, I recommend subscribing to this newsletter! But if you are wondering how much you should feel obligated to go learn about, I think you can safely restrict your attention to Bitcoin for now.