Today’s Hodlers are Tomorrow’s Venture Capital and Political Leaders
I don’t think enough of today’s hodlers understand just what it is they hold and what it means for their future if they continue to hold Bitcoin. Everyone generally gets Stock to Flow (S2F) now. Everyone has an idea of where the numbers are going, they understand that Number Go Up (NgU) and that they will (potentially) one day soon be very wealthy.
But let me tell you about what this actually means in practice from my perspective as a political economist. It has a lot less to do with being wealthy in the way that today’s low-level millionaires in the American middle class are (for now). It has a lot more to do with generational power, exercised on the individual, company, state, and international level.
Power and International Relations
Power is everything. Power is the crux of what moves people and modifies behaviours. In the realm of International Relations (IR) theory the science is centred around how we determine what constitutes power while studying its effects, how it can be wielded, who has it, how it is distributed, controlled, etc.
The two main schools of IR are liberalism and realism. Realism is more closely associated with what we would call realpolitik, basically that all international interactions come down to nation states acting in self interest in the preservation, acquisition, and exercising of power. The school of liberalism in IR is one that describes the cooperative system we see today in international relations; one of supranational institutions like the UN or EU, of increased free trade and security cooperation, and democratic peace theory.
There’s also the distinction between “hard power” and “soft power” — hard power is kinetic energy. It’s telling some entity “do this or else” and then forcing them to, either through that threat alone or through actual violence in the face on non-compliance. Soft power is influence. It’s parking a carrier strike group off the cost of Taiwan in international waters. There’s no implicit threat, no actual demand of any kind. Just a reminder. This would be a much harder form of soft power. Another example might be when the US Secretary of State visits a nation and makes recommendations or clarifies US policy positions. People listen because the United States is exercising soft power and spending social capital. This article is mostly concerned with soft power.
My specific discipline though is International Political Economy (IPE) and I come from the American camp as opposed to the British one (that is to say, I am much more concerned with quantitative, empirical data than I am with grand design theories). You can read a bit more about my background in Bitcoin and education here if you so wish.
While IPE and IR are greatly concerned with the framework of international anarchy and how states operate within that system, there is a lot of disciplinary overlap with general economics and political theory. Indeed, IPE is itself extremely multi-disciplinary, studying the effect of the micro upon the macro environment, technology development and diffusion, and how it relates to statecraft and the exercise of power.
Personally, I think we’re going to see a major realignment of international relations within the next decade. Whereas liberalism and its focus on shared institutions and democratic peace theory has been one of the most dominant frameworks in the 20th and early 21st centuries, I believe the realist school is going to be making a comeback in a very big way. We’ve seen numerous cracks form in the foundations of international liberalism over the last decade.¹ Bitcoin may be a part of, or maybe even the fulcrum, of this transition.
Bitcoin and IR Theory
I think Bitcoin is going to be a major real world test of IR theory in practice. Fundamentally, the international framework is anarchic — meaning that individual states ultimately answer to no higher unit of power and interact as equals within the framework. That’s not to say all states are equal, just that they may all exercise the same forms of power equally and have access to the same tools.²
Bitcoin too is an anarchic system. In fact, it may be the biggest example we have of a perfectly anarchic system in that it is extraordinarily difficult for any individual actor to exert their individual will upon the whole system. I believe that as Bitcoin becomes more and more valuable and important to individuals and companies, it is only a matter of time before nation states realise that Bitcoin represents a growing source of power in itself. Their traditional avenues of exercising power will be ineffectual to stop its spread and adoption — and this coupled with Bitcoin’s continued market capitalisation expansion will result in a realisation that Bitcoin isn’t necessarily a threat to state power in itself, but is rather a potential new source of power that can be leveraged to the state’s advantage in the anarchic international order.
As this realisation plays out, nation states are going to make individual calculations about how this relates to their own power relative to other states in the present order. All this is to say, smaller nations that are much more concerned about their present place in the international order and their ability to exercise power are likely to conclude that acquiring as much Bitcoin as possible, as fast as possible, before any other nation, will give them an outsize advantage in the future.³ The G20 or G7 may for a time try and coordinate international monetary policy against Bitcoin in an attempt to control it (again, wielding power to protect the institution), but the asymmetric advantage of a small nation state defying the G20 and acquiring first mover advantage by embracing Bitcoin will be too much to overcome.
Game Theory as it Relates to IR and Nuclear Weapons
Let’s talk for a second about the cheery subject of Nuclear Deterrence Theory and what it shows, in practice, about how systems of power function in anarchy. Under Nuclear Deterrence Theory, the more equal the distribution of power among current nuclear states, the more stable and peaceful relations are. Asymmetric advantage is itself a threat to the entire system, leading to the paradoxical need for all participants to maintain relative balance among themselves (and also exclude new entrants to the club for this very reason). Nuclear Deterrence Theory rests on the ability for a nuclear state to mount a successful secondary strike in retaliation for a first strike from an enemy. This credible threat of tit for tat destruction is what prevents a nuclear first strike from ever being a good policy to pursue.
It’s why the Bush Administration’s withdrawal from the Anti-Ballistic Missile Treaty in 2002 was such a big deal. ABMs provide an asymmetric advantage whereby a first strike suddenly becomes a plausible policy to pursue under the assumption your own ABMs will be successful in partially or fully stopping a second strike. It’s for this reason that, while defensive in nature, ABMs are actually quite dangerous to the stability of the system as a whole.
Another point about nuclear weapons that is informative to our discussion here concerning Bitcoin is the development and proliferation of the weapons themselves. Nuclear weapons confer upon their owner enormous power. In the anarchic international order, what we saw was a whole of government all-out frenzy to independently develop nuclear arsenals as fast as possible. It was only after this first decade of scrambling to develop or acquire that we saw the emergence of the (somewhat) stable, non-proliferation focused system of symmetric power that we have today.
I hope you see the parallels to Bitcoin in the systems described above. Bitcoin is a new, sudden source of power that nations will scramble over. In the development of any system of shared power around Bitcoin, the first movers get to set the rules of the subsequent system once power is more evenly distributed.
What Does this Mean for Bitcoin and Us?
The real world test of IR theory with Bitcoin will be to see how it all plays out. Will the G20 be successful in suppressing it? Will nations scramble to grab the best pole position for a potential new monetary order bred in anarchy rather through consensus among the powerful? Either way, it is almost inevitable that this contest will happen in some form. Combine the anarchy of IR with the anarchy of Bitcoin and apply game theory (flavours of the Prisoner’s Dilemma, the problem of coordination, and deterrence theory) and you get some sort of competition among nations.
The first decade of the existence of nuclear weapons is very informative to how nations behave when a new source of power suddenly becomes attainable. There is asymmetric, anarchic competition to acquire as much as quickly as possible in order to either maintain one state’s apparent present advantages or for states with less power to elevate their own standing within the system. The instability of the sudden appearance of this new source of power is quickly corrected to one of more relative stability as power is distributed.
The key difference here is that nuclear weapons are hard to acquire — there is requisite scientific knowledge and engineering knowhow that is difficult to perfect. There is the fissile material which is scarce in nature and hard to reliably create. Whereas the hurdle to acquire Bitcoin is almost inconsequential to even the smallest of nation states today. All you need are computer chips and open source code to mine Bitcoin. And, the speed with which any nation could make a concerted decision to pursue a whole of government approach to acquiring (note I say acquire, not adopt) Bitcoin will itself immediately create a vast asymmetry that will inherently need to be corrected⁴ through power becoming more balanced and evenly distributed.
Nation State Power in the Hands of Hodlers Today
Of the 21 million coins, where do they mostly reside today? With individuals, and now increasingly, with companies. Bitcoin is a lot of things to a lot of people. Sound money, a source of appreciation thanks to market inefficiencies, etc. To the nation state in respect of IR, Bitcoin is power. As the market cap of Bitcoin grows, so too does Bitcoin as a source of power grow, making Bitcoin desirable for nations not simply because it is wealth, but that it is also power.
What does this mean for today’s hodlers?
A lot of hodlers today understand and fully expect to be wealthy in the future. What I think many miss is that, perhaps more importantly, they will not only be wealthy, they will be powerful.
It means that if you have a sum of Bitcoin, acquired at a cost basis relative to the market price in dollars of Bitcoin today (let’s say February 2021 for posterity at an average price of $50,000.00 a coin), you currently posses a consequential amount of something nation states might scramble to own in the same way they scrambled to develop and posses nuclear weapons in the 1950s. There are massive implications for individual hodlers here, many of them negative, some very positive, depending on how and when one approaches dealing with their Bitcoin stack.
Ultimately, if I had one recommendation to make, is that if you control more than 10 million sats today, you need to start reading (a lot) about how individually powerful capital allocators today interface with the state at both a national and international level. Hodlers aren’t just going to be the equivalent of a newly wealthy Bill Gates. To the state, Bill Gates is just another source of tax revenue more than anything. Bill Gates, personally, never personally possessed the equivalent in importance and power of a stockpile of enriched uranium. Hodlers are going to not only be a source of tax revenue, they are simultaneously a source of potentially enormous, quantifiable power.
This isn’t to say hodlers can expect to be the personal targets of state attack (any state, say Cuba or Nepal), but rather that the possibility is not zero. The adversarial model in the “nation state” epoch of Bitcoin will very quickly start as “keep the hodlers down” which will likely need a focus on digital security and shift to “acquire the hodlers power” which may take the form of either dictating to the state or needing to physically secure yourself, depending on whichever state you find yourself in jurisdiction to. One thing is for certain, at first it will be very advantageous for no one to know you own Bitcoin.
But, more importantly, the fact is that since states very soon are likely to want to poses Bitcoin, in addition to all of the individuals and companies that are currently powerful within the existing framework, hodlers will become the target of extreme interest to many parties. People will be desperate to have Bitcoin within keys that they control. And not just a little bit. They will want to directly control, within their treasuries, a large percentage of the total market capitalisation of Bitcoin with free and clear title.
Hodlers, if they actually continue to hold large sums of Bitcoin⁵ into this new era, will have something that the most powerful institutions today will want. The question is, what price are you willing to give that up for? Ask yourself, is there any price at which a state would sell or give up its sovereign rights? The answer, is almost assuredly, no. There is no price. The ability to acquire and exercise power at the highest levels is priceless. Many people who today hold Bitcoin don’t realise just how powerful what they hold will one day potentially be. Many will be convinced to part with their coins at certain price levels — and this is the key part — that today’s powerful institutions will be glad to pay, because power is everything.
So this sets up a variety of paths that today’s hodlers can take. They can potentially set the price for which they give up their keys. As in, buyers will give hodlers whatever they ask for. Hodlers might demand cashflowing equity in businesses or assets in exchange for their sats. Hodlers may be compelled by the state to part with their coins at a set price, or they may have it seized by taxation, it all depends on too many factors that can’t be accurately foretasted at present.
Hodlers may also choose to exercise their power. To me, this is the most interesting. In order for this new system to function, capital will need, necessarily, to become more diffuse and utilised. So then a hodler might play the role of today’s venture capital, identifying worthy institutions or causes to lend capital to, or themselves deploy directly in support of.
Hodlers will also become, necessarily, the kind of people who are organs of the state themselves, either as politicians or as policymakers and statesmen. Power can be deployed this way within the framework of the state itself. The ability for Bitcoiners to shape the policies that will govern their power will be a valuable thing indeed. In fact, today we already see existing politicians are becoming hodlers themselves, so the process is not simply a one-way transfer, but rather a diffusion.
At the very least, today’s hodlers (if they are planning to truly hold rather than sell at some arbitrary future dollar amount) need to study and understand how capital structures work, how the wealthy physically protect themselves from blackmail, threats, and other sources of power that may attempt to take their own power away (either the state or other individuals or companies), both under the law and by other means.
The idea that you will be able to simply unplug and exist anonymously as a whole coiner is only possible if you have Bitcoins you have acquired organically (either through solo mining or through the exchange of goods and services). Any coins you have ever acquired via KYC are potentially known to the state (and subsequently cannot become unknown to the state, not even by coinjoin as the state will still know you acquired the coins in the past and you will thus be made to account for them). So you must plan accordingly to interact with the state as a newly minted powerful person.
All of this is only possible if you hodl though. If, and I truly mean this, you feel that the burden of being a powerful person does not interest you, you should identify your exit price and sell your coins at that point (and always keep your eye on what nation states are doing in relation to the price, it may change how quickly you wish to “get out”).
Otherwise, if you like the idea of being a venture capitalist, a statesman, or some other sort of person who exercises power, all you need to do is hodl. Many will try to convince you to part with your coins, but remember, there is no price at which the state would sell its sovereignty, and thus you too might adopt the position that there is no price, monetary or otherwise, that you might be paid to part with your keys.
Learn how venture capital works. Learn how wealthy people physically secure their persons and property. Learn how powerful people interface with the nation state. All of this may, in less than a decade, become the most important information you posses for your life in this new paradigm.
Or maybe Bitcoin will go to zero, what do I know.
Footnotes
[1] Think of the cooling of relations among Western powers and the rise of China. In fact, China is a fascinating case of publicly being one of the fiercest proponents of international liberalism with their words while working behind the scenes the most to dismantle that system and rebuild it to their own structural advantage (a very realist mode of operation).
[2] A perfect example of this is the Bolivian Navy. Bolivia is a landlocked country, but it hasn’t always been. In the early 1880s, Chile seized Bolivia’s coast during the war between their nations and the Bolivian Navy functionally ceased to be a fighting force capable of putting ships to sea. Yet, Bolivia still maintains a “Navy” by fielding a disproportionately large number of patrol ships on lake Titicaca while maintaining a force of about 2,000 personnel who keep their naval traditions and skills alive. The recovery of Bolivia’s coast is still today a point of national honour. And so, Bolivia maintains a Navy despite having no access to the sea. Only an independent actor in an anarchic international system in which power is everything would do this.
[3] As a thought exercise, think in gooey terms about the relative power of Singapore or Qatar versus say Belize or Antigua and how they acquire and exercise power. Also related, I had a recent thread on Twitter about the subject of first mover advantage in a whole of government approach to Bitcoin mining at the state level.
[4] If you haven’t picked up on it yet, this is incredibly good for NgU.
[5] For the sake of this exercise, let’s assume 10 million sats is a “large sum” of Bitcoin.
