Bitcoin and the Money Hierarchy
Nik Bhatia in an interview on why Bitcoin is unique among cryptos, its role in the future of money, and the US Strategic Bitcoin Reserve
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Amidst new all-time-highs, groundbreaking crypto legislation in the US, and a continuous torrent of innovation, investors and tech-enthusiasts have many question marks popping up. One of the questions I get asked most frequently is whether Bitcoin’s place as the undisputed number one crypto asset will remain and even grow more distinct or whether altcoins will soon catch up. Instead of simply sharing my thoughts, I sat down for an interview with somebody who has a very clear opinion on Bitcoin’s position among the ever-growing abundance of crypto coins: Nik Bhatia.
Nik is the founder of The Bitcoin Layer, an Adjunct Professor at the Marshall School of Business, and a bestselling author. His book Layered Money has changed the way many of us think not just about cryptocurrencies but about the financial system as a whole. I found his money hierarchy approach so enlightening that I included it in my Top 50 books on finance and tech. Now Nik Bhatia is back with a new title called Bitcoin Age. In this edition of The New Frontier, Nik shares some of the key insights and discusses his view on current developments in the crypto-sphere.
Igor: Can you briefly explain the core idea of layered money and how Bitcoin Age, your new book, builds on this?
Nik: Layered money is a way to understand money in hierarchical terms. So money is classically not thought of in a ranking form. We are able to define currency, even credit money. But rarely is it thought of as a monetary hierarchy.
And the hierarchy comes from balance sheets of financial institutions. Who is issuing what and who holds which liability of which institution? That is the idea of layered money.
And when I was teaching fixed income and needed to teach the students about money, I thought Perry Mehrling's paper The Inherent Hierarchy of Money was the perfect way to describe this.
And then I wanted to tell a history of layered money, a history of hierarchy. Where did it come from? Why did it evolve away from gold based to not gold based? How did gold layered money go to credit layered money without gold? And once we understand that, then we can understand potentially the value proposition of Bitcoin being a non-liability money. And that is why Bitcoin is so important.
In Bitcoin Age, my second book, instead of looking at the layers of money, I contrast the dollar credit system to Bitcoin as a commodity. So it has layered money undertones, but it's not presented with a layered framework. It's a way for people to understand what is Bitcoin, where did it come from, what is the dollar's credit system, and why might the two coexist in the future.
Igor: So would it be fair to say that is also the reason why in your view CBDCs cannot replace Bitcoin even though they're a direct claim to central bank money? While CBDCs break layers, they are still linked to the whole credit system of the US government or any other government for that matter?
Nik: Of course. CBDC is the digital version of paper currency, which is a liability of the central bank and/or government, however you would like to frame it. So it cannot be a replacement to Bitcoin. CBDC is simply the digital evolution of central bank layered money.
Igor: And why does it have to be Bitcoin? We have tens of thousands or maybe hundreds of thousands of tokens and digital currencies. Why can’t it just be Ethereum or Solana, or even Bitcoin Cash for that matter? Is there something that makes Bitcoin different to all others?
Nik: Yes. Bitcoin is the only digital asset that has true decentralization. There are other technologies that coexist, and we know that they coexist because they have a market cap that has sustained value, sometimes less so versus Bitcoin, sometimes on pace with Bitcoin. And so the market is rewarding different digital assets in different digital environments. But if you look at just the size of the market cap, there's obviously a very large lead of Bitcoin versus its competitors.
So we can say that the market is assigning Bitcoin as the number one cryptocurrency. But if we look at the adoption of Bitcoin from the corporate and the government side, the mining operations that are bolstering the security of the network, the information that we're getting from the institutions themselves, we can conclude that Bitcoin has the network of money.
Other networks can exist and do exist and even exist with ascribed value that is even maybe sustained over medium time horizons with Bitcoin. But the network for money is Bitcoin. And the market and the populace have recognized it.
Igor: And when you say decentralization, do you think it's because of the Proof-of-Work (PoW) mechanism or do you think the uniqueness lies in the genesis of Bitcoin?
Nik: The creation story is important. I would say that it's relevant. But the decentralization comes from PoW mining as well as – and this is very key – the original game theoretical rules of Bitcoin, such as block time averaging ten minutes, using a difficulty adjustment to the halving of the supply awarded to each miner every 210,000 blocks, and the supply being set on course to reach a maximum of just under 21,000,000 in the year 2140.
Those core rules are not only unchanged, but reinforced and were reinforced early by the decentralized network. And, importantly, they were done in the early years after the creator left and after having lost any material influence over the network.
So locked-in protocol decentralization combined with PoW-mining and those core game theoretical rules remaining fixed – that stands alone. Even the second largest cryptocurrency by market cap, Ethereum, has had several rules changes. It went from Proof-of-Work to Proof-of-Stake. That was an obvious sign that there is a group that can influence the direction, but I wouldn't even argue that. The simple fact that supply rules have adjusted over time makes Bitcoin really stand alone.
Igor: So would that mean in turn also that things like houses in the metaverse and other NFTs are more or less purely speculative assets without any grounding in the same scarcity that Bitcoin has?
Nik: I'm not here to judge the market nor a person that finds value in it. I think what I lead with is my own research and what I teach. And so I believe that there is a global fascination with the discovery of a brand new commodity called Bitcoin. But I can't tell you whether the house in the metaverse is a good investment or not.
Personally, I'm not interested in it because it's outside of my area of interest or expertise. I can promise you that they're not global macroeconomic commodities and that they don't have any role in the future of the monetary system, so they don't enter my research framework. And I think that that's a better way than to say, “oh, it's a speculative asset or they shouldn't exist.”
But I really do respect the market. That's part of my practice.
Igor: Let’s return to Bitcoin. Let’s envision that it becomes the new future of money, used at large scale for monetary transactions. There are two things it would have to overcome. First, its lack of efficiency (ten minutes per block, transaction costs, block limitations, etc.). How does it solve these?
Nik: I don't think Bitcoin is limited by its capacity. It's very fascinating to see that in the last several months, there have been plenty of times that Bitcoin blocks were almost empty. The fees are next to zero in Bitcoin and in dollar terms to send a transaction. Now that's not always the case. Sometimes the blockchain is busy, and it's expensive. However, Bitcoin is not at capacity or overcapacity.
The market again, we respect the market. Bitcoin's price is at an all-time high. It's sixteen years old. What that says is that the blockchain works exactly as intended, and the market doesn't have any problem with the way that it works. And that is even without mentioning Lightning Network and its ability to scale Bitcoin transactions instantly. I use Lightning Network all the time. 90% of my hand-to-hand Bitcoin transactions, which are book sales, are done in Lightning Network. Meaning, the customer wants to pay in Lightning. I can accept their Lightning, and we are doing an instant Bitcoin transaction that doesn't need the blockchain because we're already part of the Lightning Network.
Bitcoin is doing fine because it is a digital commodity, not an instant currency. Lightning Network is a network that allows you to use Bitcoin as an instant currency, and I do genuinely believe that Lightning Network and Bitcoin can and should be thought together as one.
Bitcoin is decentralized. It is scarce. These are the fundamental metrics that are valued by the network. And, again, that's my subjective view, why I believe it achieved value for the first eight years and where the value has gone since then.
Igor: The second issue I see with Bitcoin as the foundation to the future monetary system is the deflationary nature of Bitcoin. After all, it was one of the original intentions of Satoshi to combat inflation. Isn't this contradictory to using Bitcoin as a payment instrument? If I have something that appreciates in value, I'd like to keep it rather than spend it.
Nik: Yes. Bitcoin is better kept than spent. I would argue that. It doesn't prevent people from moving it, though. And, in the end, if you have an asset and you wanna trade that asset for another asset or a good or a service, you have to move it. And that's the nature of money. So Bitcoin moves. It moves all the time. And it moves from young coins. It moves from old coins. It is spent. Even though it's better held than spent, it is still spent. It's still used. And that is why I believe that the dollar system will continue to exist because I think the world is dependent on credit expansion to survive. So these two contrasting systems coexisting make it even more important to have some Bitcoin to counteract the existing system.
But it doesn't mean that you can stomach holding the Bitcoin forever because at a certain point, you will want some utility from it, meaning a house or goods or services or to grow your business or to grow your family. So, again, the market is showing us that whatever narratives there are that work against Bitcoin, they are not outweighed by the market demand for it.
Igor: I'd like to move to what's happening in Washington at the moment. How do you see the clarity of regulation happening right now, not just for the future of the crypto industry, but generally for the development of the technology?
Nik: It's very important. I argued in Bitcoin Age that the US government adopting a pro Bitcoin policy in several steps over the years has been remarkable to see and without a doubt it contributes to Bitcoin’s longevity as a network. After all, the United States is the most powerful institution in in the world for the past century and for the next century. And for the government to be adopting wholehearted full digital currency, pro Bitcoin policies is a big thing.
And it's not just the government. I always remind people and myself that in a representative government, the government is a representative of the populace and the will of that populace. So the GOP shifting toward a pro Bitcoin policy is the people saying: “Hey, do this! The other side isn't protecting us. We need protection for ourselves, so we will lobby and we will help you win. And then when you win, you make sure to pass laws that protect us and our business activity.” That's a tale as old as America.
You can call it special interest, or you can just say a portion of the populace is fighting for their own right to exist and practice their business legally without undue prosecution. And so, the US passing pro Bitcoin laws and digital currency laws is positive. It is not the largest thing to ever happen because this is a glide path. The IRS and the CFTC started putting out their rulings in 2013 and 2014. The CME got involved in 2015. The and the SEC got shot down in 2023, meaning it faced notable legal defeats. There's a long history. This is significant, but it was well telegraphed. And it is Bitcoin positive.
Igor: You said earlier that you foresee a future in which there will be coexistence between the US dollar and Bitcoin. But if The US – and other countries for that matter – shift their reserves towards Bitcoin and away from the dollar, isn't that gonna hurt the US dollar? So why is the US government pushing for the adoption of Bitcoin?
Nik: It it's interesting to see it unfold. The US government, since November, has now made a shift toward explaining to the rest of the world it should not be stockpiling treasuries as its reserve asset. And the way to do that is to import less from those countries so that the US is exporting less dollars. So it is policy. It is to extend the longevity of the US dollar system's dominance. But, paradoxically, it means that you make sure that the rest of the world is holding less US treasuries than they currently do. So you actually want to scale down their reliance on US treasuries as the reserve asset. And the only way that the United States can do that is to buy less from abroad and to make some of those goods itself. And then selling more planes to Europe and Asia and The Middle East and balance the dollar flow.
And in that search, the world needs alternative reserve assets such as gold and Bitcoin. So a healthier Bitcoin network and a larger market capitalization of Bitcoin makes it a legitimate reserve for other countries to hold.
We (the US) want to be the dominant trade influence in the world. That doesn't mean that its sovereign debt is the reserve asset of the rest of the world. Those two are not the same thing. It's not that they're unrelated, but they're not the same thing. I would point people to the speech given by Dr. Stephen Miran on April 7, five days after the Rose Garden Liberation Day tariff initial announcement.
He's the head of the President's Council of Economic Advisers and he laid out this idea that the United States is providing a dual public good in the form of treasuries as a reserve asset as well as global security, and that those two now are coming at a cost. And that will help The United States on a policy level.
You can disagree or agree with that stance, but that's the way that the US is going. It signaled it to the rest of the world in March and April and is now executing on that agenda.
If you want to dig deeper in the topics discussed, order your copy of Nik’s new book right away:
And in any case make sure to check out Nik’s website, where you can find more on his research, teaching, podcast and much more:
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