The “BIG FOUR” BITCOIN AHA-MOMENTS – From the Stone Ridge Shareholder Report

Bitcoin is a journey, not a destination, and everyone is on their own path. Every morning when I study Bitcoin, I find
myself deeper in awe, humbled by the power, and potential, of its unstructured simplicity. The more I learn about
Bitcoin, the more I realize how much there is to know, and how much I want to know. There’s beauty in Bitcoin.
I study Bitcoin standing on the shoulders of giants, pioneers who have come before me and blazed the trail. There
have been dozens of moments in my past eight years of morning study when I had to put the book down, or pause
the podcast, sitting in stunned silence for a while, after reading or hearing something that I knew immediately
would change my worldview forever. If you study Bitcoin intensely, with humility, and are mindful of Wallace’s
deep wisdom that sometimes “the most obvious, most important realities are the ones that are hardest to see”, you
will end up seeing a lot you can’t un-see. I certainly did. The biggest Bitcoin aha-moments from the past eight
years of my early morning ritual, quite a long list difficult for me to curate to just four, are below.

1) Salability across time
Gold has been a reliable store of value because of its scarcity and historically low annual supply growth of only
1-2%/year. There has never been a “gold hyperinflation.” Indeed, gold has held its value over the centuries,
while hundreds of other monies have come and gone. However, gold’s supply is not impervious to its demand.
If, hypothetically, gold went to $100,000/oz tomorrow (up more than 50x overnight), we can be sure enormous
resources would immediately shift to gold mining, and the miners would find some way, somehow, to accelerate
its supply growth, driving its value down.
In contrast, there will only ever be 21 million Bitcoin. Bitcoin’s annual supply growth, which asymptotically
approaches zero over time, is now down to about 1%, on par with the historical annual growth in the supply of
gold. While far from perfect, gold is Bitcoin’s closest real-world analogy. However, the ultimate supply of Bitcoin
is fundamentally limited by the design of the protocol itself and cannot be increased regardless of its value or
the level of demand. Bitcoin is the first store of value in history for which its supply is entirely unaffected
by increased demand. From this perspective, Bitcoin is better at being gold than gold – it’s even more salable
across time.

2) Salability across space
As we moved beyond traveling by foot and horse, beyond the development of affordable commercial air travel,
and then, especially, beyond the internet’s Cambrian-like explosion of network power, gold’s low spatial salability
became an acute flaw even the most ardent “goldbugs” miss. Gold is simply hard to transport. This is where
USGPM, or the Fiat Standard in general, shines. Though fiat’s periodic, human-nature-induced hyperinflations
made it a huge step backward in terms of salability across time, it was a substantial leap forward in terms of
salability across space.
However, contrary to common misconception, Bitcoin moves much faster across space than fiat, increasing our
capacity for long-distance international settlement by about 500,000 transactions a day, and completing that
settlement in about an hour, rather than the current state-of-the-art 3-5 days, or longer, for final international
fiat settlement. Bitcoin’s protocol and network topology renders national borders irrelevant, which is especially
empowering to the world’s most vulnerable and unprepared for fiat hyperinflations (think: Venezuela, Turkey,
Lebanon today).
Even within a country like ours, do not confuse the speed of your Visa payment with its final settlement. No
settlement occurs when you buy your coffee at Starbucks. Rather, your bank and Starbucks’ bank generally settle
2-3 days later, with each bank taking credit risk to the other along the way, with rare, but occasionally disastrous
results. Bitcoin safely settles about every hour and, as a bearer instrument, credit risk is not a concept. From this
perspective, Bitcoin is better at being fiat than fiat – it’s even more salable across space and, because it’s not debt
like fiat, has no credit risk.

3) The Difficulty Adjustment
Everything Satoshi did in inventing Bitcoin was non-original – his genius was in seeing how combining a specific set
of previously solved problems could, together, solve certain unsolved problems – except the Difficulty Adjustment.
For Institutional Use Only.
The Difficulty Adjustment, entirely original, is, in my opinion, Satoshi’s most underappreciated breakthrough, a truly
genius application of game theory, and the fundamental reason why Bitcoin’s network has always been secure.
So what is it?
Suppose Bitcoin’s price rises, creating an incentive for more Bitcoin miners to mine (remember, successful
mining results in Bitcoin rewards, thus the continuous link between Bitcoin’s price and the total worldwide
mining incentive). In this case, the Bitcoin protocol will automatically raise the difficulty of mining, such that
the creation of new Bitcoin, and the timing of transaction verification, does not accelerate beyond its preset
schedule (about every 10 minutes). Instead, suppose Bitcoin’s price falls, and subsequently higher marginal
cost Bitcoin miners rationally turn off their machines. The Bitcoin protocol will automatically reduce the difficulty
of mining, such that the creation of new Bitcoin, and the timing of transaction verification, does not decelerate
below its preset schedule.
How does the protocol do this? Imagine that I tell you that the product of two prime numbers is a certain three-digit
number and I ask you to guess the two primes (and I also remind you that a property of prime numbers is that the
product of two primes is uniquely the product of those specific two primes). There is no closed-form solution to
my question, which is a fancy way of saying you have to randomly guess until you figure it out. Since I told you the
product of the primes is only three digits, you’d probably be able to guess the two primes fairly quickly. However,
suppose I told you the product was five digits? How about ten digits? How about twenty digits? You can quickly
see how much harder and harder, and then way, way, way harder the random guessing can become.
The Difficulty Adjustment is akin to adjusting the number of digits of the product of the primes as a function of
how much mining power is on-line at any given time. The more miners, the greater the number of digits of the
product of the primes. The fewer miners, the smaller the number of digits such that, even if all commercial
Bitcoin miners, and their combined super-computing power, suddenly went off-line overnight, hobbyists
mining on laptops at Starbucks would keep the entire global Bitcoin network just as secure. Bottom line: the
Difficulty Adjustment was the “missing piece” of decades of previous attempts at decentralized electronic
money. It ensures that every 10 minutes a new Bitcoin block is rewarded and all transactions in the interim
are accurately and immutably verified. It is what drives Bitcoin’s salability across time discussed above: even
amidst periods of surging demand for Bitcoin, Bitcoin miners have no ability to mine Bitcoin faster, making
unexpected inflation impossible. Forever.
Typical of Satoshi’s understated style, the Difficulty Adjustment was described in just two sentences in his original
Bitcoin whitepaper: “Mining difficulty is determined by a moving average targeting an average number of blocks
per hour. If they are generated too fast, the difficulty increases.” As an aside, the Difficultly Adjustment also
serves to limit wasted mining energy, further incentivizing miners to mine, but that benefit pales in comparison to
its impact making Bitcoin inflation-proof.
The Difficulty Adjustment has now been continuously tested for twelve years, at total global network power levels
ranging from a just a few laptops, all the way up to enough energy to power New York City, and with lots of total
network power volatility along the way. The total network power volatility is what requires the Bitcoin protocol to
continually adjust the mining difficulty, akin to continually adjusting the number of digits of the product of the two
primes. And, astonishingly, just as Satoshi designed, no matter the global mining capacity, or its variability, a new
block is verified every 10 minutes…every 10 minutes…every 10 minutes.
Speaking of energy…

4) Bitcoin’s Use of Energy
The amount of energy Bitcoin consumes is the sum total of the energy consumption of all the mining machines that
secure the network. While hard to know exactly, a good estimate of the global total consumption is about 8-10 million
people worth of energy. Absolutely enormous. In a warming world, how can this be good?
First, the principle: Bitcoin is a better technology for performing central banking than the current government
monopolies on central banking. In the same way that cars consume far more energy than the bikes and horses
they replaced, and electric lights replaced candles, and central heating replaced chimneys, and computers
replaced typewriters, Bitcoin’s better monetary system consumes far more energy than the current central
For Institutional Use Only.
banking system. Throughout history, energy use has grown whenever free people making free choices have
decided for themselves that the price of the extra energy for the new technology they wanted was worth it.
Today, every day, 24/7, Bitcoiners around the world make the decision that the price of Bitcoin’s energy use is
worth it because Bitcoin is better technology for money.
Second, the practice: Bitcoin mining is the only profitable use of energy in human history that does not need
to be located near human settlement to operate. The long-term implications of this are world changing and hiding
in plain sight.
Before Bitcoin, the problem of energy has never been its scarcity, but only our ability to channel it geographically
where it is needed most. Before Bitcoin, that was exclusively where humans lived. In contrast, Bitcoin’s mining
energy is solving a different problem. Because of satellites and wireless internet connections, Bitcoin mining can be
located anywhere.
For example, remote, destitute areas blessed with moving water can monetize their natural resource good fortune
by creating clean, hydro energy and using it to mine Bitcoin. Thus, Bitcoin can make monetizable isolated energy
sources all over the world – like waterfalls, running rivers, or creatable dams – now entirely untapped because they
would be cost prohibitive to connect to electric grids close enough to residential or industrial areas.
In doing so, Bitcoin can fundamentally change the economics of energy by introducing a highly profitable use
of electricity that’s location independent. The world has never had a profitable use of energy that’s location
independent. Now it does. And since fossil fuels are already too expensive to be a profitable source of Bitcoin
mining energy, I believe the only long-term, profitable Bitcoin mining will be powered by hydro.
Imagine a future with Bitcoin mining firms, unsubsidized, in extraordinarily isolated locations – visualize a waterfall
in a largely population-free part of an African country suffering from abject poverty – easily connected to the Bitcoin
network, building serious energy infrastructure to monetize the local clean energy source for mining. However,
once the industrial-strength, profitable infrastructure is in place, let’s extend it. Let’s build roads. And housing. And
schools. And hospitals. Ultimately leading to human settlement.
The net result can be people locating around new, Bitcoin-driven hydroelectric energy infrastructure, with more
and more of humanity clustering around cheap, clean energy sources. Historically, our energy challenge has
been to move the power to the people. With Bitcoin, we can move the people to the power.
Consider that the world’s major population centers – think New York, London, Paris, Tokyo – each developed
where they are geographically because of natural seaports, waterways, and trade routes. Energy was a nonfactor because placement of these cities was all pre-energy (i.e., pre-fossil fuels).
As Bitcoin finances the for-profit development of cheap, clean energy infrastructure on a massive scale, it can lead
to a future in which more and more of the world’s population lives near abundant energy with an extraordinarily low
marginal cost of production. This matters because cheap energy equals human flourishing. That’s an equation.
Cheap energy = human flourishing.
Beyond the revolution in monetary policy that Bitcoin already represents, Bitcoin may also represent the biggest
catalyst the world has ever known for developing abundant, clean, cheap energy. And, therefore, one of biggest
catalysts in the world for human flourishing.
Can you tell why I’m all-in?
Investing in Bitcoin, now exiting its 12th year and especially after a 200%+ return in 2020, is extremely
uncomfortable for most everyone, just as investing in Amazon stock (AMZN) was for most everyone following
its 12th year as a public company. Even for investors who see the long-term potential of Bitcoin’s monetary
properties, they may wonder if they are just too late to invest. Did they miss it? Has all the future value been
priced in?
I believe our evolutionary biology makes us hardwired to consistently underguess the power of modern,
technological network effects, since nothing in our history resembles them. For the vast, vast, vast majority of
For Institutional Use Only.
human time, we lived in small tribes, entirely unconnected to other humans around the world. Combine this
observation with prospect theory, and regret aversion, and we can solve the mystery of the missing of AMZN
Why do so few Americans today own more than $1 million of AMZN?
In AMZN’s early years, most investors were hesitant to buy it even as they loved using the service, believing each
year that they “missed it again,” that the price had run away from them. Why? Because in each those first 12
years, AMZN’s high price that year was, on average, 175% higher than AMZN’s open price of that year. Whoa.
With that kind of price action, it is understandable why, year after year, investors thought they “missed it again.”
Yet, though understandable, year after year investors were, with high consequence, very wrong: in the ensuing 12
years – years 13 through 24 – AMZN increased 62x.
Bitcoin is now 12 years old. What will one Bitcoin be worth 12 years from now? $100,000? $500,000? $1,000,000?
$100? I have absolutely no idea whatsoever about Bitcoin’s future price. However, I strongly believe that
the centralized class will continue to significantly underguess the appeal, and therefore likely the price, of
a decentralized monetary network to the rapidly emerging decentralized class – us Bitcoiners – just as they
significantly underguessed the power Google and Facebook and Netflix and Amazon every year for decades, and
even as they loved those services and used them daily.
From a valuation framework perspective, I believe Bitcoin should be viewed identically to those network
business models – the value of the network growing with the number of users6 – except for two major
differences. First, money is primordially more important in a way even the most hilarious on-demand cat
videos, or same-day delivery of any product we want, will ever be – there is no comparison. Second, Bitcoin
lacks the possibility of antitrust enforcement. Ever. No matter how big and no matter how valuable it gets.
Nor can Bitcoin ever be globally confiscated. Yes, individual countries can attempt to confiscate Bitcoin and,
over time, some may try, just like gold was confiscated by the Gold Reserve Act in the U.S. in January 1934, nine
months after FDR’s April 1933 Executive Order made it a criminal offense for U.S. citizens to own it or trade it.7

However, just like the internet can be censored in certain countries, but cannot be turned off, Bitcoin can be
(attempted to be) confiscated in a country, but cannot be turned off. And just as no global “off switch” exists for
the internet, for the same reasons and others, no such switch exists for Bitcoin. With regard to confiscation, and
putting aside property rights for a moment, Bitcoin is really nothing more than a password to a private key that can
be easily stored in anyone’s memory via simple phrase memorization which, to me, makes it more salable across
space than gold and fiat in more ways than one. If anything, in my view, it is more likely that we see a country peg
their currency to Bitcoin, perhaps a developing country escaping a hyperinflation in the coming decade, before
we see one that tries to (unsuccessfully) confiscate it. Remember, unlike gold, with Bitcoin there’s no vault. And
good luck confiscating my memory.

The trillions of dollars of central bank-driven low or negatively yielding financial instruments demolish the dreams
of savers and retirees, prohibiting an enormously large and growing group of individuals from meeting their
retirement wants, wishes, and – tragically – even needs. Free money has consequences. Because it is not free.
No matter how well-intentioned, runaway global money printing, and the resulting financial repression, is society’s
largest global challenge.

Regardless of Bitcoin’s future ascent, or descent, the long-dated monetary liabilities of individual Americans
are denominated in U.S. dollars. Tackling our collective, fiat-based societal retirement challenge head-on
leads to an interesting and important question: “what do you have to believe to be true for Bitcoin to be your
vessel for savings?” The answer: point to point – meaning, from today until your long-dated liabilities (e.g.,
your retirement spending) start coming due – and regardless of USGPM volatility along the way – you only
have to believe one thing; that USGPM will depreciate relative to Bitcoin over that time period, as it has ~80%
in the last two years alone.
Remember that the most important trades are the ones we make with our future selves, that our search for ‘eversounder’ money is an individual, intuition-based optimization, and that, instinctively, we know our survival depends
on durably storing of our life force. In this context, is it any surprise that millennials voting with their dollars, and
with more distrust for traditional institutions than their forebears, have already made Bitcoin “the millennial savings
account”? And in this context, it is any surprise that two highly rated Life & Annuity insurers, and two highly rated
Property & Casualty (re)insurers – among the most brilliant, forward-thinking investors I know, and each, by virtue
of their business models, with extraordinarily long-dated U.S. dollar-denominated liabilities – have direct or indirect
exposure today to more than $350 million of Bitcoin, all purchased and held through our Bitcoin-focused affiliate?
One thing I know for sure: they, and insurers in general, are just getting started.
The power of the insight – that only point-to-point USGPM depreciation matters, not volatility – will lead, I believe, to
an explosion in Bitcoin-driven financial innovation, including Bitcoin-denominated life insurance for the 30-50-yearold crowd, and Bitcoin-denominated annuities for the 50-70-year-old-crowd. Having a non-zero allocation to
Bitcoin-denominated life insurance, and annuities, may represent our most potent defense against the malevolent
consequences of benevolent, well-intentioned past, current, and future central bank activity. Given the potentially
revolutionary impact of these products on our great country’s retirement crisis, I will be working tirelessly on them.
Stay tuned.

When the Fed creates $3 trillion in a matter of weeks by pushing a button, it consolidates the power to price and
value human time. In our country, humans are not supposed to have that kind of power over other humans.
“There are two ways to enslave a country. One is by the sword. The other is by debt.”
– John Adams (1826)
When a regional Fed President brags in March about having “an infinite amount of cash,” he toxically undermines the
American virtue of thrift, dangerously decouples risk-taking from the consequences of risk-taking, and epitomizes
the influence of absolute, centralized power. When Chairman Powell, no matter how well-intentioned, says in June,
“We’re not even thinking about thinking of raising rates,” at Stone Ridge we respond, “We’re not even thinking about
thinking of not buying more Bitcoin,” and we did. Bitcoin is our peaceful weapon of choice against central bankdriven time theft.
However, buying Bitcoin this year wasn’t new for us. Bitcoin has been the principal component of our firm’s
treasury reserve strategy since 2017 and many of us have been personally involved since 2013. Like everything
we do at Stone Ridge, we have skin in the game. The owners of Stone Ridge Holdings Group, together, collectively
own more than 40,000 Bitcoin. All purchased and held through our Bitcoin-focused affiliate. Actions speak louder
than words. Larry Fink may call Bitcoin “an index of money laundering”, but I call it “an index of money laundering
printing.” Bitcoin definitely does not care what Larry Fink thinks. And P is P. As long as “money printer go brrrr”,
I’ll keep buying.
Perhaps just in time, each U.S. citizen now has a choice. You can stay on the Fiat Standard, in which some people
get to produce unlimited new units of money for free, just not you. Or opt in to the Bitcoin Standard, in which no
one gets to do that, including you. With the option, now, of a monetary system governed by rules instead of rulers,
on behalf of myself, my family, and the firms I’m responsible for leading, I’ve made my choice.
At the most superficial level, buying Bitcoin as a portfolio diversifier, or as a hedge against inflation, makes good
sense, and I, obviously, strongly believe that a 0% allocation is the wrong number for every investor.
For Institutional Use Only.
However, Bitcoin is anything but superficial. In a world replete with monetary unfairness, injustice, the
institutionalization of moral hazard, and the State’s increasing domestication of our individuality, Bitcoin’s
incorruptible fairness, justice, truth, and beauty represent a beacon for all optimists who seek personal sovereignty,
personal improvement, and peace.

As the Founder of one of the largest Bitcoin-focused firms in the world, I don’t mind if you come to Bitcoin for the
price. I just hope you stay for the principles. Bitcoin is far more important than a non-zero portfolio allocation.

Leave a Comment

Your email address will not be published. Required fields are marked *