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How Bitcoin Buyers Of Last Resort Navigate Price Volatility

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How Bitcoin Buyers Of Last Resort Navigate Price Volatility

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[00:00:10] CK: Gentleman, the current price of Bitcoin is $21,311. This is the sixth installation of Bitcoin Tina on Bitcoin. We’re titling this the hardest trade part two: becoming the buyer of last resort. I am CK and I am super excited to be sitting back with Bitcoin Tina to bring you this next installation of the special series Bitcoin Tina. Of course Bitcoin Tina’s here, but also have a rising star and an incredible macro commentator in the space, Joe Carlasare. Tina, welcome back. Why don’t you talk to us about why we’re coming back for this sixth edition and why Joe is joining us.

Bitcoin Tina: Hey CK. Hey Joe. I got to know Joe probably over the last 18 months through Clubhouse. We actually met in person at the conference. Joe has become really one of my favorite Bitcoiners. I they’re group of guys who really are favorites of mine and they’re favorites for a bunch of reasons. They’re really smart people. They’re fun to hang out with. They’re fun to talk to. Joe is really smart. He has a broad knowledge and understanding of economics, Bitcoin, law. He’s a practicing attorney, and I have a lot of respect for Joe. I have great conversations with him. I think we both see the world in very similar regards and I I think people need to hear Joe’s clear thinking and He is not only a clear thinker, but he’s great at expressing it. And so I considered him an extremely good friend. I am truly blessed to have made a friend like Joe on this journey in Bitcoin. And I consider myself really quite lucky. I good friends with CK. He’s become a really great friend. I am really so lucky to have gotten to know such fine people in Bitcoin. And it’s what makes Bitcoin so special to me, not just because of what I think Bitcoin will do for humanity, but because some of the really best people who I’ve ever met in my life. And I consider myself very lucky. I am truly blessed in that regard.

CK: We’re definitely lucky to have gotten to know you, Tina, and, you know, our friendship has birthed this special series. And a lot of people would consider it prophetic when they listen to you at $3,000 bitcoin talking about mental models for hyperbitcoinization. I think, you know, we came together to talk about how, you know, the, this changing paradigm and why everything is changing, not just for Bitcoin, but how the world works. And that’s something that people need to pay attention to, I guess, you know, why don’t we kick it off with that.

[00:03:02] Bitcoin Tina: One of my favorite quotes, you’ve heard it a lot was in the big short, I’ll probably botch it up here. It’s attributed to mark twang. It’s not what you don’t know that gets you or hurts you. It’s what, you know, for certain, that just ain’t. So, I think this is so much of an overriding theme of the time in which we live, particularly as it relates to markets, the economy, where Bitcoin fits in.

And, I think people have developed these models, which I believe are the process of failing. I think people attribute way too much credit to the federal reserve. I am not a lover of the federal reserve. I think they have gotten far more wrong in their history than they have gotten. Right. I think the federal reserve is incompetent.

And I do not believe that things, people believe like pivots will necessarily make differences. I think we are broadly speaking early in the end game, I think, is this decade maybe reaching into next decade, Joe, a few minutes ago sent me the ninth inning. I don’t know if it’s right to describe it as the ninth inning or bottom of the eighth.

I, I really don’t know in baseball analogies, maybe this is a, maybe this is an extra innings game. It’s hard to know, but we didn’t just get here yesterday. A lot of people want to frame our current market situation, economic situation as though it started in 2020, it didn’t it’s much older than that. It’s decades old it’s decades in my opinion of bad policies, which have gotten us here.

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I think there are lots of people who do not agree with me, who think that this system that we have is fixable. I don’t believe that I don’t believe it’s fixable. I think we pass the point of no return and that’s a really critical difference between the way I see the world. And some of my contemporaries see the world who think that if we just go through a stagger amount of pain, this thing can be fixed.

Credit systems are by their nature, fundamentally inflationary. They have to be credit systems. Require continued credit creation. Otherwise you fall into potentially hard downturns. So by their fundamental nature. And by the way, I heard somebody say this the other day too, and it’s worth commenting on, cause I’ve thought this for myself for years, we don’t really know what makes CPI inflation.

We think we do. We have no clue. There is so little that we actually know about economics. We think we know far more than we do. And I remember, and I’m not gonna get this quote. Right. I looked for it recently read or listened to the Lord’s of finance by Ahamed Liquat or Liaquat Ahamed. I forget his name off the top of my head.

It commented about those financial leaders in the time this was coming into and around the time of the great depression, 29, 30, 31 32. And. They didn’t do enough and they may not have understood enough about what was wrong or what they could do. They were limited in their actions. And I think that the more I get to understand about things like the Euro dollar market, I think they’re far too many people who think we know much more than we do about the way the us and global economic system work and their interactions with each other.

I listen to people like Jeff Snyder, who talks about the Euro dollar market. It’s very much of an opaque market. We do not have good measures for this, and yet it’s critically important to the way the world works. The Euro dollar futures markets, an enormous market that’s used for hedging globally. The Euro dollar market.

We live in my opinion, in the euro dollar standard, we do not live in a U.S. dollar standard. That’s wrong. These markets are enormous and it’s unfortunate that we don’t really have good measures for this. We’re very much as a society economists flying by the seat of our pants and you’ll never get those admissions from those people.

They won’t say that. It’s true. I don’t even know if they know that it’s true.

[00:07:38] Joe Carlasare: Tina, it’s been a pleasure. Just I’ll say from the outset, getting to know you and becoming a close friend and CK, likewise, I really enjoy our conversations together. I agree with everything Tina has said so far and the way I would frame it is this.

I think that we could be very much entering a paradigm shift entering does not mean tomorrow or even next year, but there are the telltale signs that the times are changing all around us. You see typical relationships between things like the bond market and the stock market not acting in ways you would normally expect.

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And what I think we wanted to get through in this episode was that. When there is a paradigm shift when you have rapid change in society, in financial markets, in Bitcoin and all aspects of life, really, you should expect. Volatility to increase. You should expect risks that you could not normally foresee.

And I think that dovetails into the quote Tina mentioned about mark Twain. You should expect that what may come in the marketplace in the market for Bitcoin and other financial assets over the next several years may be very different from the slow March up into the right that we have seen, you know, for the last you know, 10 years.

So this is not meant to be an overly bearish or a negative doom and gloom type outlook. It’s meant to be really one message that emphasizes the problem and it, emphasizes a message of preparedness, flexibility, risk management. This will be the key for surviving the hardest trade.

So let’s go into the problem real quick, and then I’ll give Tina a chance to get into this. The problem, as he mentioned is the credit system, the credit. System as he put, it needs constant growth, it needs to pull forward future consumption. And they have done that in many ways by lowering interest rates at the short end.

And this has been global. It’s not just the federal reserve, it’s all central banks. They’ve tried to pull forward future consumption. The problem becomes that type of a system where you are forced to pull consumption from the future is fundamentally unstable. We must either continue to grow, or we flip into these tightening liquidity traps, which can have extreme results.

And as you do more and more of this intervention by policy makers, both on the fiscal side and on the central bank side, you create a more fragile system. The idea is that as you strive to make a system more stable, you indirectly cause it to be more unstable. And that is what I think we’re seeing right here.

Tina, maybe you can chime in,

[00:10:19] Bitcoin Tina: I’ve had this mental model for years. Trying to remember one of the first times I heard people talking about this was they were talking about the fed in this particular case that the fed drives into a ditch and guns. The engine goes shooting over the top of the road and lands in a ditch on the other side of the road.

I think this is how the world has worked, but it’s historically more elongated. And we had the benefit of dealing with particularly coming out of the seventies, a fairly high rate environment, which enabled fed policy to work better because you were able to grow the value of asset markets and.

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In some senses, they had easier tools at their disposal to benefit pulling forward demand. Historically housing and auto markets were used to, they used to call it priming the pump for the real economy. Those were very major markets and by it’s by raising rates at the end of cycles and lowering them coming to the next cycle, they were able to help expand production of housing and autos.

We went through years of this. The nineties, we had a lot of what was known as cash out, refinancing, benefiting from increase in housing prices and declines in rates. We did this preceding the global financial prices while the housing bubble blew to enormous proportions in the early two thousands and attempted more of this wealth effect, post global financial crisis GFC where I think a lot of this moved into the sovereign debt bubble.

So these policies helped move the economy along, help soften the downside blow. And in many ways, maybe that’s exhausted. In some regard. And I’ve had the belief for a number of years that when it comes to dealing with the real economy and this pertains to the fed, but it’s broader than just the fed it’s the fed, the treasury maybe Congress that there are no rules and whatever it takes.

And I think, although we’ve seen some of that already in global financial crisis during COVID, I expect to see more of it. And so recently when I saw this tweet by Matthew Pines, where he described known aeronautic failure, something called the Phugoid cycle where plane climbs and dives and climbs and dives the example that he shows here is oscillations which seem to grow an amplitude until there is failure. He writes Phugoid cycle, dynamic instability leads to self excited, divergent oscillations, and exponential runway known failure mode and aeronautics and monetary policy. And so I think in where we are in the bigger picture is this decade is going to be potentially even more volatile than things we’ve experienced in the last 40, 50 years.

[00:13:46] Joe Carlasare: I completely agree Tina. And I think that when you’re looking at this focus on the federal reserve and other policy makers, our fiscal authorities is in some ways an action. What is the real problem? What is really driving these rapid accelerations up and accelerations down? Yes. Central bank policies and fiscal authorities play a role, but what we’re dealing with are these huge macroeconomic trends.

And I think that you have to look at what, what drives their response to try to keep the system together, to try to kick the can down the road. And it’s really driven by three things we’re gonna briefly touch on. Number one is debt. The amount of debt to GDP is at historic levels, unprecedented in human history.

Second issue is what should be a good thing, but is actually causing all sorts of externalities and unforeseen events, which is poor demographics. And what I mean by poor demographics is primarily an aging world that is not able to be as productive as prior eras and overall stagnant productivity. So let’s touch about each of those really quickly in the issue of debt we already discussed.

And I think it’s well documented that most of the Western world and even some emerging markets are just absolutely saddled with incredible amounts of debt. They are saddled with that debt because that was the only way again, to pull forward consumption. They were forced to, I think, as you say, Tina inflate or die let a liquidation cycle that could be very difficult for people to take hold or to try and spur forward consumption by spending beyond their means. So the debt is an overhang which hurts productivity and it naturally drives long end real interest rates down. Same thing with poor demographics. In the, and maybe we could show these charts in the visual version, but in 1990, the median age population of the United States was in the low thirties, 31, 32 and a half by the 2022 we’re now at a median age of 38 and a half. So substantially higher. And as that median age rises, our productivity declines, you have more and more of a population who are not able to drive forward economic growth, which is what a real economy needs, substantial productivity increasing in growth. And the technology that we’re setting is not leading to the sort of rapid explosion of productivity that we saw in the industrial revolution.

And this is true outside of the United States as well. The median age in China, for example, you know, in the early two thousands was in the low thirties. Again, we’re entering a period where. Over the next several decades, we’re gonna enter a median age in China that is north of 45. That is going to substantially change the productivity and growth of the world, China, which was the served as the manufacturing Mecca of the last several decades is now gonna have an older population, which are not going to be as productive as before.

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So all these things naturally are going to weigh against productivity and they’re gonna weigh against real growth. And what that leads to us to is a necessary conclusion. The necessary conclusion is that you are going to have to push forward, consumption through radical policy measures. Things like negative, real rates, which there are parts of the world that already have that or UBI or these other programs to drive forward consumption.

So when you enter that new paradigm, things are not going to behave financial assets and society in general is not gonna behave as it had for the last several years. And add into that, the fact that you have political and geopolitical uncertainty across the world, both domestically and abroad, you’ve got a fragile political systems that have not been updated to adapt and have the nimbleness required for this new paradigm.

You have essentially a powder keg of volatility in all aspects of our life. That is, is really gonna be problematic moving forward. It’s gonna cause unforeseen events that we couldn’t possibly calculate at this point. So, Tina, what about that? Do you agree or disagree with?

[00:18:04] Bitcoin Tina: Well, what’s interesting about negative real rates is, it’s always important for people to remember that one man’s debt is another man’s wealth. And so there are many battles going on here. We people talk about things like the fourth turning. There is this big battle between those who own the debt and those who pay the debt. And it’s not pleasant for owners of debt to have to deal with negative real rates to try to reduce the impact of that debt.

And I think that the credit system that we live in is fundamentally in failure mode with this design. And I think that what we will see is that policies that are in place will very much ultimately benefit Bitcoin and enable Bitcoin to be. To grow dramatically larger to transition the world into a world where Bitcoin becomes the basis for the financial system.

This unfortunately is not a smooth process and it’s not a gentle process cuz lots of people in the world don’t necessarily agree with that point of view. They think that maybe we can continue along the same way that we’ve been going for the last 40, 50 years. I’m optimistic that Bitcoin can solve those problems and that over time as we progress along in this decade, that many others typically no coiners who fight this notion will slowly and then maybe suddenly change their view or be forced to change their view on how this works.

[00:20:04] Joe Carlasare: So what I think this leads us to is a necessary conclusion that real rates need to continue to fall. And that the current system requires more and more leverage at marginally lower rates.

And that becomes more difficult for every sovereign as you reach the lower bound as you reach 0% rates. And I want to just include here a quote from macro Alf that I think is it speaks to exactly what Tina is saying. And what I’m saying here is that quote, as we kick the can down the road, we make the system inherently more unstable and prone to the butterfly.

A tiny butterfly moving her wings, for example, real yields moving a bit higher or a small recession is enough to generate a tornado in markets. And I think that fits in line perfectly with Tina’s notion of the Phugoid cycle of the notion that you’re going to have to do more and more to, to prevent even the slightest disruption of the current system.

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Even a slightest disruption of a tiny recession can have devastating results because of the debt and leverage in the system, which is why policy makers know implicitly, that there’s only so much they can push. There’s only so far. They can go without a systemic risk. Tina, what do you always say about the fed?

What are your general rules about the fed?

[00:21:27] Bitcoin Tina: The two rules about the fed is whatever it takes and there are no rules.

[00:21:35] Joe Carlasare: So I think at that this point, if you look at that notion to operate in the current paradigm, knowing that central bankers and fiscal authorities will not let people suffer the real pain because it’s just, it would be systemic failure, the risk of systemic failure.

I think there are only really a couple options option number one is a de- leveraging event, which is simply not politically viable. The people in my particular view in my base case is that policy makers at a certain point are not gonna be given enough leeway to make people take their medicine.

The, we’ve grown accustomed to the standard life we have, and we’re not prepared for long term hardship, as well as I think even prior generations. So if Austerity and de-leveraging are off the table, the next option really is a war, which is a politically viable form of austerity. This has happened in human history and the McKinsey report that looked at countries that became extremely indebted found that, you know, either forced austerity or war were the primary ways that you got out of these types of extremely high debt to GDP ratios.

Those are the vast majority of cases. You get out either through a war or through a forced austerity. And majority of those are wars. And then the final thing is you can rely somewhat on technological innovation to drive a tremendous amount of productivity and grow your way out of it. I don’t see much on the horizon in that front.

I know people talk about AI and other you know, significant technological developments. I hope and pray that can get us out of this debt problem. But realistically, the most likely scenario, I think. Additional attempts to kick the can down the road. Things like Bailins, UBI, Debt Jubilee, monetizations of the debt.

These sorts of tools have not yet even been fully tapped by fiscal and monetary authorities. And I expect them to come. And I know Tina, I think I think you do as well. Am I correct there?

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[00:23:29] Bitcoin Tina: I do. I think we’re going to see more and more policies come into play that just people have not really thought in terms of.

And I think that should be, you know, we should have that as part of our expectation. And I think that Bitcoin can uniquely respond to that. And I think help us ultimately transition to a to a much better economic situation, but this is going to be a very rough road. And it’s important to really anticipate that. And it’s going to take some time for no corners to change their opinion on some of these things. And it provides Bitcoins, a huge opportunity.

[00:24:18] Joe Carlasare: I agree. And the one thing I’ll finally close on this, if you expect more intervention from fiscal and monetary authorities, if you expect that things like nominal yields are gonna go negative.

One of the things that I think is something that is a safe assumption is that bearer assets will become more attractive. If you are dealing with substantial amounts of wealth stored in a bank, which are subject to confiscation, subject to any sort of effort by policy makers to control your access to that capital to that wealth. Storing cash in vault becomes pretty attractive. Even with the risks associated with having substantial amounts of cash. The same is true of Bitcoin. If you expect more intervention and more capital controls and more efforts by policy makers to control the flow of money because of the overarching debt problem, you should expect something like Bitcoin to finally start to make sense to the no coiners.

You should expect the fact that if I can have this asset that cannot be confiscated, that cannot be controlled, that can be held in substantial size, on my own, without other people having access to it. That is really attractive versus all of the alternatives out there. Anything else that is held by a custodian?

Tina, your view on this, I think is that is probably one of the most favorable things about Bitcoin. I know you have this great line and I want you to share it with us about, I think it’s will Rogers and his commentary about return on your money. Can you give us that quote?

[00:25:52] Bitcoin Tina: It’s not the return on your money, you to be concerned about, but the return of your money. And I think that you know, we often talk about the various qualities of Bitcoin finite production a finite amount of Bitcoin, but in many ways, probably the single most important aspect of bit of Bitcoin is its sovereign censorship resistance.

It’s ability for you to be able to hold your wealth outside of the financial system. This is so poorly understood by people maybe even poorly understood by people who own Bitcoin, how powerful this is, how meaningful this is. If you are a wealthy person, I heard somebody commenting in one of the spaces I was listening to the other day.

He said, well, why would a wealthy person need Bitcoin after all? You know, I can understand this person said, I can understand why somebody might need it you know, in a merging market, developing country. This person’s not open to the notion that responses to the existing financial situation might be various forms of capital controls.

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They’re not open to the notion of how the world might change in ways that they don’t expect, because they are misunderstanding that Mark Twain statement, that it’s not the things that you don’t know that gets you, but the things you think, you know, for sure that just ain’t so. This person said this person with 25 million, they would have no need for Bitcoin, but,

I think we’re gonna see things that are very hard for a lot of people to imagine , in this decade into the next decade, possibly. Yes this is incredibly powerful property of Bitcoin, which is very poorly understood by people. And I think the world, as we go through these dynamics, we’re gonna very much learn the hard way things that Bitcoiners already understand, and this can help you to get to those going from gradually into suddenly periods.

As the world wakes up to the need. Banks, in my opinion, were created in many ways to, to solve a problem with money.

Businesses are by their nature. Custodial you create securities. They’re centralized by their very nature. Most businesses are centralized by their very nature money. Doesn’t have to be. We’ve learned particularly since Bitcoin and gold is not really usable, functionally. You can’t easily send it across the world without using some version of a bank.

So this property of being able to hold a substantial portion of your wealth outside of the control of trusted third parties is enormously important. And this person who was making these comments in the space has no understanding of this. And I think many of these people, and there are many of those people have an awful lot of wealth going to find that the things that they think they know, just ain’t so, and that will bring about a very rapid change in the way people, even in places like the west, see Bitcoin.

[00:29:23] Joe Carlasare: So we’ve mapped out the problem here, right? We’ve explained how that demographic stagnant productivity are gonna require necessarily more and more draconian policies from fiscal and monetary authorities.

But, what is the utility for somebody to listening to this podcast? And I think the way we’ve divided this up, we wanna talk to two different audiences. If you’re a no coiner, we’re gonna start with you. If you, who are someone who has no exposure to Bitcoin, and you see this asset that, you know, several months ago was north of 60,000, and now it’s down to 20,000 in terms of it’s USSD value.

You may come up me and say, Joe, why the heck would I buy something like that? Why would I put my hard earned money in an asset like that? Given what you’re talking about, which is an increasingly volatile world with risks that are not easy to anticipate. And I think the answer to that starts with understanding the difference between volatility and risk. Obviously anyone, even those that don’t hold Bitcoin are familiar with it’s price, volatility, that it can fluctuate wildly in the short run and that all, although it is designed to be the hardest money ever created, you have to come into this small market with a recognition that the price is gonna be extremely volatile.

And in the next 10 years, 20 years, you’re gonna enter into a high volatility how volatility regime, where you could see even more wild volatility than anything we’ve been accustomed to. People share that chart about the from Y Mar Germany about the gold mark versus the paper mark. And you can look at the end of that and see the rapid appreciation.

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But in the middle there, there’s a ton of volatility up and down in that pricing mechanism. But what I would tell to a no corner is focus less on the price volatility in the short run and focus more on the risks that will come with this system and the efforts of policy makers to try to prevent it from breaking down. The risk

are different from volatility in the sense that we always quantify or anticipate risks, things like we talked about earlier, like Bailin and negative interest rates, negative nominal, interest rates, those types of things I think people underestimate as Tina said, and if they are a real credible policy that could be put in place by central authorities.

And if you understand that, and you’re a no corner and you recognize that I’m gonna try to mitigate against some of those risks with the understanding that the price is gonna be very volatile in the short run, that I think is a good way to frame it for folks that have substantial amounts of wealth, nobody needs to put a hundred percent of their net worth into Bitcoin.

I know there are people that do that and I don’t have any judgment on them, but if you’re a very wealthy person and you have zero exposure to this asset, given the geopolitical and economic risks on the horizon. So, so I think that’s a mistake and Tina I’d be interested in your thoughts.

[00:32:24] Bitcoin Tina: The process of hyper colonization is not an easy one.

Bitcoin has to fight its way to becoming the one and only money accepted by everyone everywhere. It’s something I like to tweet and it’s. The circumstances of the world, which are helping to bring about Bitcoin. And I think this is very important. The world will learn why we need Bitcoin from the actions that are existing in the legacy system.

And I think that’s going to be a difficult and a painful process for many people. It’s so difficult to recognize flaws in the existing system. It, it’s difficult to deal with these things cuz people are familiar with what they’re familiar with and they have a very hard time imagining the world, which is different from the one they know, but we’ve moved far along in this process of creating way too much debt, bad economic policies.

And I happen to believe and maybe this is wrong on my part, but I happen to believe that the world is teaching those who don’t yet understand and will continue to do so why we need Bitcoin as much as we do. I’m not sure if I’m addressing adequately what Joe’s talking about.

[00:33:47] Joe Carlasare: So Tina, again, like, I think we need to hone in if you’re, if you are talking to somebody that’s a no coiner right now.

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And they say, I just saw my asset, that I bought ,a little tiny exposure to Bitcoin drop by 70, 80%. Why would you think that this is the asset to get me through to the other side of the Phugoid cycle of the extreme volatility we’ll see in financial markets and even politically over the next decade, why, what would be your response to that?

[00:34:18] Bitcoin Tina: It’s almost a bit of unpleasantness that people have to deal with. Lennon said there are decades when nothing happens they’re weeks when decades happen. We as Bitcoiners may be reading this wrong. Maybe there’s some magic that can happen, take place, to enable the world to deal with these various problems.

Although from commentary that we hear from many people in the legacy system, I think that many of ’em are well aware of these problems and are trying to figure out ways of dealing with it. I think that those ways of dealing with these issues that we’ve discussed of their demographic issues, debt problems are going to be potentially quite unpleasant. And I think it’s very hard for people to recognize how those issues will affect them. And some people simply won’t believe it right away. They won’t see it. They won’t try to understand it. And simply price going up will be what attracts people into

Bitcoin sotoshi said, and I’m gonna butcher this. I seem to butcher quotes. If you don’t understand, I don’t have the time to explain it to you. Not everybody will understand why they need Bitcoin at the same time as others understand why they need Bitcoin. I may not be able to explain why you need Bitcoin adequately to your understanding.

And it’s not my problem. It’s your problem. And you may not like that answer. But that’s how it is. That’s the way the world works.

It’s not always easy for people to understand. That’s why I, that I think the world is in the process of teaching us why Bitcoin is necessary, why having money, which you control is so important. And you’ll hear many people say, well, it has to be custodial.

I don’t necessarily believe that to be so, people often make lots of excuses to why things have to be a certain way. And I think, learning can be a hard process. I mean, it’s just that simple.

[00:36:44] Joe Carlasare: You’re saying it just, it has to be custodial. Tina, just so we’re clear what you mean when you say it has to be custodial?

[00:36:50] Bitcoin Tina: No. I’m saying when people say it has to be custodial, I’m saying that I think people will learn that may come at a very high cost.

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[00:36:57] Joe Carlasare: I wanna just make sure you we’re speaking the same language. When you say the people are saying it needs to be custodial. They’re arguing that you can’t take self custody of your funds.

That’s the argument from most financial people in finance right now, correct?

[00:37:10] Bitcoin Tina: Correct. And I think that’s wrong. I think that’s fundamentally flawed. I think that it is quite possible for many people to learn how to self custody, their Bitcoin. And I think that this process will become easier in many ways over time.

And there will be tools that get developed. That will make this process easier. So I’m not particularly concerned about it, but the point is I think the world is in the process of teaching us why this is so important. And some people figured it out earlier than others. And that’s just, it’s just how the world is.

Not everybody understands the same information at the same time.

[00:37:50] CK: So Tina, I wanna jump in here and you know, some of the earliest people into Bitcoin are some of the surest on how things are gonna play out and other audience that we wanna speak to are the Bitcoiners. I know a lot of Bitcoiners who, you know, they have a very specific strategy and they’re really focused on accumulating as many sats as possible.

And I don’t know if they are ready, are prepared for. The amount of volatility in the real world that all of us and everything we own is gonna experience. So I feel like there’s a lot that we can say to them around this that is gonna be pertinent as well.

[00:38:31] Joe Carlasare: If you look at Bitcoin and how it’s moved over the last 10 years, I think we can be confused to think that cycles are a thing.

The having cycle always is gonna generate a certain response that Bitcoin’s price can never fall beneath the prior, all time high, that there is a steady, upward climb to the right on this asset. And while that may be true, and none of us have a crystal ball as to the path, things will take in the future.

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I always like to at least keep my mind open that might not always be the case that hyperbitcoinization, that can decelerate based on what’s going on in the macroeconomic environment. And I think we call this the sacred cows of the Bitcoin community.

When we first started the idea of this podcast, Bitcoin had not yet breached that prior. I think it’s 19,600, 700, whatever it is on the exchange, all time high from the 2017 bull market. And there were many of us who said. At the time don’t be so convinced that can’t happen, that we can’t with the right macro environment or the poor macro environment rather fall beneath that prior high.

There are structural issues in our marketplace. Things like the liquidity on the exchanges, things like the banking system, which can cause havoc in the Bitcoin price in the short run. And this is not to say that, you know, Bitcoin won’t appreciate and won’t do well over the next 10 years. Merely that the path it may take may not be as predictable and orderly as some Bitcoiners think it is that you could see rapid depreciation of the price of Bitcoin weight against dollars or rapid acceleration.

It could happen in the middle of quote unquote having cycle. Or it could happen completely opposite completely divorced from any association ship with the having cycle due to macroeconomic factors. I’ll give you one specific example. We talked about earlier, my personal belief, that UBI is on the table.

Now I will tell you that if we get UBI in significant parts of the developed world in significant parts of GA countries, I think Bitcoin’s price is going to respond incredibly well. I like to think of it that I have a mental model that assumes Bitcoin’s price can do extremely wild things, arguably things that are more unpredictable and more extreme than anything we’ve seen in Bitcoin’s history, because it matches the volatile environment we’re moving into.

I told Tina last year that I have in my mental model. The notion that Bitcoin within a 12 month trading period can range from $5,000 to $500,000. And when people hear that, they think that’s a price prediction, it’s not a price prediction. I’m not saying Bitcoin’s going to $5,000. So please don’t represent it as that.

What I’m saying is that the macro landscape, which is evolving rapidly can drive the price down and up in unfathomable ways. As we move into this new paradigm, as we move along the Phugoid cycle that Tina’s been talking about. So Tina, I be interested in your view of that.

[00:41:42] Bitcoin Tina: Very simply put that we have to be as cautious of mark Twain’s warning as anybody else that we cannot assume that what we think we know.

If so, and I think there are many Bitcoiners who have And maybe me included who have notions of what we think we know about Bitcoin and we need to be prepared for a world that may be even more volatile than what we think. And that’s for me probably my primary point. And maybe I am just as susceptible to these mistakes as others might be.

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[00:42:27] Joe Carlasare: Yeah. So, so that’s really what we wanted talk about with respect to the Bitcoin community, these ideas about the havening, the idea about Bitcoin being coupled the financial assets in general, the idea that Bitcoin must trade in a certain way that in a bull market, alt coins are gonna always rise and alongside Bitcoin and they’re gonna outperform Bitcoin during the bull market. These are notions that will be tested. And it is my view that it is more likely than not that they will fail. It is not necessarily a prediction or a guarantee of any of this. But I think that what we’ve already seen. In the last quote, unquote cycle of 20, 20 and 2021, as you’ve seen Bitcoin trade in ways, it has not typically traded.

You’ve seen it react in ways to the legacy market that it is not typically reacted. That is telling you something that is a direct signal that Bitcoin is evolving. It’s maturing into a different asset than it’s been since its inception. And I expect Bitcoin to continue to mature. Tina, you always say, you know, I think you compare it to an adolescent, right?

You say in Bitcoin’s age it’s barely reaching its bar mitzvah. Is that what you say?

[00:43:36] Bitcoin Tina: Well that’s because it wasn’t yet 13. You know, you can have some insights as to what an adult is like, but not necessarily, no, because there’s still many things that person has yet to learn.

And many things about them that will change in their they’re teen years. And so Bitcoin is very much like that. And just be prepared for learning and understanding the nature of what this thing is and that it might not fulfill your near term expectations.

[00:44:08] Joe Carlasare: Yes, I agree. And I think that as much as we wanna focus on Bitcoin and Bitcoin trades or what Bitcoin does or how it functions in many ways. As I see it, this is about us as people, as market participants, as people that are trying you know, as traditional finance legacy finance is trying to understand this asset, which I think you’ll agree with me

bitcoin is still very much poorly understood. So I bring that up because it’s not necessarily about Bitcoin. It’s about the context, the larger macro environment that it’s living in. And this selloff in Bitcoin that we’ve seen, which has been an extremely painful protracted long selloff. You cannot say that this selloff in many ways is not a product.

Let me rephrase it. So it’s not a double negative. You have to understand that this is a product of the macroeconomic environment we’re in with extreme amounts of debt, extreme amounts of leverage in, in the legacy system. Is it not Tina?

[00:45:07] Bitcoin Tina: I believe that’s correct. And so there will be more criticisms that we’ll hear from no coiners

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they will become more vigorous in their negative commentary and critiques. Because maybe we’ve told ourselves some things that aren’t really necessarily true. And in the process of telling ourselves these things, we’re also telling the world. And so it becomes easy critiques for people to make because we ourselves are in the process of learning about Bitcoin and as it exists in the given macro context of economies and markets.

So we need to be acutely aware that. There are a lot of moving parts to what’s changing here. And I’m not certain that many people in the world understand those moving parts and they certainly don’t understand Bitcoin. And so we need in some ways to steel ourselves to this, understanding , that we are feeling our way through this process.

So you need to better understand the context, the macro context that is teaching the world, why it needs Bitcoin, but at the same time, many people don’t wanna learn and we need to understand mistakes that we as Bitcoiners might have made in trying to describe it, because we are still in the process of learning about Bitcoin ourselves and not fall prey to critiques, which are not well thought out or well founded. And so it’s the reason I called it the hardest trade is because it’s quite difficult.

You know, it’s one thing to talk about it. It’s another thing to live through it and deal with the consequences of these, you know, very volatile movements. And so I think trace Mayer was right many years ago, talking about the need to not just be the hodler of last resort, but the buyer of last resort.

I think there are huge opportunities for people to own and end up owning much more Bitcoin than they might have even thought possible. And so we have to understand these processes happening in the greater context in the macro environment, and also understand Bitcoin better ourselves and be prepared for its volatility to make it through this could be a very difficult process. I hope that makes sense, Joe. I’m not sure if it does.

[00:48:07] Joe Carlasare: I think it makes a lot of sense and I think that’s the, really the heart of what we’re trying to get through with this podcast. Because I think. As the old proverb goes, smooth seas do not make skillful sailors.

And in many ways, the last 10 years of Bitcoin’s adoption to have been primarily by the legacy markets, which have been stable up into the right alongside Bitcoin, they have made a lot of people think they’re skillful sailors. They’ve made a lot of people think that they can just, you know, buy in Bitcoin, leverage up Bitcoin, take out loans to buy Bitcoin.

And it’s always gonna go up into the right. And it’s always gonna be a smooth path forward. They may be right. I’m not saying I have a crystal ball and can tell them that they’re wrong. My concern is that might not be the case that you might be in for more Rocky seas. And those that get to the other side will be those that are prepared.

Those that assess risk. In proportion of what their financial circumstances are. Tina and I talk about this often that he’s in a totally different boat financially than where I’m at. I still work a job still practicing and bringing in income. So for me, I’m happy when the Bitcoin price goes down. I guess that’s probably overstating happy.

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I guess I’m not in despair when Bitcoin price goes down incredibly because I will be buying, I will be buying all the way down and I will be stacking sat, other folks that are perhaps too much over their skis. You can see it, you can feel it on Bitcoin, Twitter, and on spaces. And in clubhouse when Bitcoin’s price declines, there’s this you know, real downtrodden depressed mood.

My, my view of this is you need to be prepared to be resolute and And have a mindset that you will be the buyer of last resort. Come what may with the price in the short term, because it can be very rough. It may not be smooth sailing from here on out. And I think Tina, you agree with that?


[00:49:53] Bitcoin Tina: I agree completely. And and it’s just, we, as Bitcoiners will be better served in, in understanding that. And I think, you know, we do understand that there that Bitcoin is highly volatile, but somehow I think the context might be different because I don’t think Bitcoin has actually been around through a potentially very serious economic downturn.

[00:50:23] CK: Gentlemen, this is something that I’ve just been so passionate about, which is that Bitcoiners need to focus on getting on the other end of this journey. Your stats will be most valuable when Bitcoin is the one and only money as likes to say. But until then, you know, there’s a lot that you have to do to position yourself.

And you have to be honest with where you are and what you’re willing to do. So, difficult choices will have to be made to be that buyer of blast resort and be well positioned to get the maximum amount of stats across the finish line. So we don’t have to get into detail there. I think that this has been a very informative and very sobering rip for the listeners out there the Bitcoin Tina on Bitcoin fans. So, I encourage everyone to look yourself in the mirror, be as honest as possible with yourself and, you know, really try to think through what Bitcoin Tina and Joe are saying here. I think that in general, everyone should listen to the previous five episodes as many times as possible.

So, make sure to do that and listen to Bitcoin Tina on Bitcoin in order to prepare yourself for the hardest trade this thing that we’ve been trying to spell out to everyone for a couple years now. So with that, you know, I think we can close it out. Joe what would be your last word?

And then Tina can have the final on the podcast .

[00:51:52] Joe Carlasare: CK and thanks Tina for inviting me on this site. I truly appreciate it. The metaphor I use for this is. Imagine you’re at the south rim of the grand canyon you’re looking across and you know that there is another side. The other side can be that Bitcoin standard, that Bitcoinization that we talk about.

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But if you’re focused only on the other side, you’re missing the chasm that is right in front of you, the path that can be quite treacherous for you to get across until you get to that other side. And my message for anybody listening to this is consider your circumstance financially, consider your job, your livelihood, your obligations, and understand that there may be some bumps along this ride, as you get to the other side.

What I like to think of with respect to my Bitcoin allocation is that when I go to bed at night and put my head against the pillow, I’m gonna be fine if I wake up the next morning and I see that $5,000 Bitcoin or lower. It’s not gonna cause me to be financially insecure. It’s not gonna jeopardize my family’s livelihood.

I’m gonna be very upset and disappointed of course, as anybody who tells you otherwise is lying, but I’m gonna be fine. I’m gonna be nimble where I’m gonna be buying down there and I’m gonna continue to buy all the way back up because I do believe Bitcoin is the solution, Bitcoin Tina, there, there is no alternative.

That’s how I view Bitcoin. The same thing is to be said for the radically opposite result that I am prepared mentally. If I wake up tomorrow and a few pieces on the macroeconomic chess board have moved. Now Bitcoin’s sitting at $500,000 in a rapid short amount of time. I’m not gonna be panicked knowing that I missed out on the greatest trade of my lifetime because I will have my Bitcoin in cold storage and I will be prepared for that.

So that’s the message I think, is that is to operate and make all your decisions, order your life’s choices. With the understanding that you do not know the path this may take, and all you can do is focus on what you can control. You can’t control the price of Bitcoin, but you can control the financial decisions you make.

So with that I thank you so much, Bitcoin, Tina and CK for having me on.

[00:54:08] Bitcoin Tina: That’s why I like Joe so much because I use the same example of the grand canyon, myself, that you know, we focus on the other side, but the path can be treacherous in terms of getting there. And I think Joe said it well, I don’t really think there’s much to add to that.

I agree with what Joe said. And I think that we. We want to steel ourselves and be prepared for potentially treacherous path and be able to build in whatever shock absorbers we need psychologically, financially to make it through a potentially rugged path. And and that’s very important and don’t underestimate the importance of the psychological as well as the financial, both are very important.

And some cases, the psychological is more important. You can diminish your psychological account very rapidly and replacing that sometimes very difficult. In my opinion, it’s important to not trade trading is incredibly difficult and this period may be even more so I would very much avoid debt because debt is not your friend in a very volatile environments.

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And if you are a trader, which I strongly suggest you don’t do cut your size, trade much smaller trade in sizes that are inconsequential, you’ll do better. I strongly advise you not trade, but this is very important. Preparing yourself for what could be a rough road, 10 years from now, 20 years from now.

If people look on the back on this, if they remember me at all, I would like to be remembered as someone who didn’t blow, smoke up people’s asses. Was not rah rah Bitcoin, but tried to deal with the realities and the difficulties of the process that we have to go through. And to try to be honest, matter of fact .I’m very optimistic, but there are times that we have rough patches to go through and I would hope that would be my legacy in Bitcoin to help people understand Bitcoin, but also to make it through difficult times, to make it through, to get to the other side and to not simply be part of the chorus of rah rah.

And that’s it. Thank you.

[00:56:43] CK: And that is it. Y’all, there’s a whole podcast about not trading and I think it’s really about. Positioning yourself to handle volatility. So thank you, Tina. Thank you, Joe. This was a fantastic addition to the series and I’m excited to hear what the Bitcoiners have to say. So I’m sure there’s gonna be a lot of reaction to this, but with that Bitcoiners, thank you for listening and let us know what you think.


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El Salvador Takes First Step To Issue Bitcoin Volcano Bonds

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El Salvador Takes First Step To Issue Bitcoin Volcano Bonds

El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.

First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.

A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.

“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.

Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.

The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.

The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.

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How I’ll Talk To Family Members About Bitcoin This Thanksgiving

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How I’ll Talk To Family Members About Bitcoin This Thanksgiving

This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.

I don’t.

That’s it. That’s the article.

In all sincerity, that is the full message: Just don’t do it. It’s not worth it.

You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.

Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.

Get real.

If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:

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  • Your family and friends don’t want to hear it. Move on.
  • For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
  • People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”

“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”

It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.

  • Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
  • What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
    No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice.
  • It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.

Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.

However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.

Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:

“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”

If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.

Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.

Leave them alone. They will find bitcoin in their own time, just like all of us did.

This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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RGB Magic: Client-Side Contracts On Bitcoin

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RGB Magic: Client-Side Contracts On Bitcoin

This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.

The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”

While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.

But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.

This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.

Title deed of unregistered real estate propriety

Source: Title deed of unregistered real estate propriety

How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.

Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:

  1. You have to buy a lot of newspapers for the verification process. Not very practical.
  2. Each contract needs its own space in the newspaper. Not very scalable.
  3. The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.

For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?

If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.

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transfer of ownership of utxo

Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.

This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.

To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.

So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.

In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.

Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.

Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.


RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.

This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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