An Open Letter to Ray Dalio re: Bitcoin (Part 2)

An open letter to hedge fund colossus Ray Dalio regarding his worldview, the forces of financial nature, and how Bitcoin is bound to reshape both.

In Part 1, we introduced the Open Letter and presented a primer on money. In part 2, a primer on Bitcoin is provided, followed by look into the pinnacle of Ray’s principled worldview: the idea meritocracy.


Primer on Bitcoin

(again, this Primer on Bitcoin may be skipped by the reader who understands Bitcoin’s general functionality/economic properties)

Bitcoin can be thought of as the first incarnation of self-sovereign money in digital form. Its transactions are irreversible, uncensorable, and unstoppable. In other words, Bitcoin is the world’s first digital bearer asset. Possession of Bitcoin is achieved by holding its private key, which is an alphanumeric data string that can be stored in analog, computer, or even human memory. Its absolutely scarce money supply is anchored to the most fundamental commodity in the universe — energy.

Bitcoin’s stock-to-flow ratio, the measure of its monetary hardness, increases (inevitably) every 4 years and will be about twice that of gold after its 2024 downward inflation rate adjustment (the halving); at this point, Bitcoin will definitively be the hardest form of money that has ever existed. Bitcoin’s uncompromising, apolitical monetary policy is enforced by unbreakable cryptography, hence this inevitability (as sure as 1+1=2). Its unrivaled hardness is made possible by an ever-rising production difficulty that requires expenditure of real world energy in a process called proof-of-work. This anchor to economic reality is also called mining — in an ode to the difficulty of gold production — and is the source of Bitcoin’s monetary integrity.

Bitcoin is also the world’s first asset with perfect supply inelasticity, as changes in its price have absolutely no impact on its supply flow. This means changes in demand for Bitcoin can only be expressed in its market price. If the price of gold increases, its new supply flow will increase as new miners enter the market and new methods of gold mining becoming economically feasible (since the gold miners can sell their product at a higher price), thereby applying downward pressure to its stock-to-flow ratio. With Bitcoin, no matter how much its price increases, it is absolutely impossible to create any new supply flow beyond its mathematically enforced and universally transparent issuance schedule. Also, a higher market price means a more secure Bitcoin network, as the resources allocated to mining are used to secure it. Like a vault with walls that thicken as more value is stored within it, Bitcoin adapts to become a more secure monetary network as its market capitalization grows. Absolute obstinance of the algorithmically enforced Bitcoin monetary policy drives a virtuous cycle that perpetuates the expansion of its network:

Bitcoin’s money supply is absolutely scarce, meaning its monetary policy (or money supply) is fixed — only 21M units will ever exist. Before Bitcoin, only time itself exhibited the property of absolute scarcity. This means that its stock-to-flow ratio will continue to increase and eventually become infinite when the last Bitcoin is produced sometime in the middle of the 22nd century. Bitcoin’s monetary policy is becoming the most trusted in the world as it is fully transparent and unchangeable.

Bitcoin runs countervailing to government monetary policy which is uncertain, opaque, and subject to change based on the whim of bureaucrats. Essentially, we each must decide if we are to trust the whimsical nature of self- interested bureaucrats or the inviolable nature of mathematics to manage our money supply. Shockingly, whether we decide or not, the harsh economic reality of Bitcoin’s superior hardness is likely to be imposed upon us all, as history teaches us the economic consequences of hard money cannot be ignored. As we saw earlier, the free market for money is winner-take-all. Critically, Bitcoin is open-source, like a spoken language, and it is transcendent of regulations and the legal insulations that preserve the monetary monopolies of central banks.

So we have Bitcoin, the hardest form of money in history, competing directly with government money, the softest form of money in history. So long as Bitcoin continues to exist, it will likely continue to outcompete gold and fiat currency in the free market, and its market capitalization will grow. Eventually, each and every holder of any softer form of money (whether its gold or fiat currency) will be faced with the grim reality of a gradually, then suddenly, depreciating asset relative to Bitcoin’s ever-constricting new supply flow. Imposition of this harsh economic reality will be applied persistently and each of us will be faced with the same mathematical and market-driven dynamic that has catalyzed the evolution of money throughout history.

Hard money, as selected on the free market, reigned for the first 4,900 out of 5,000 years of human commercial history and all signs indicate we are witnessing its reemergence in the rise of Bitcoin. Before government intervention, money supply was not a matter of policy, but instead was governed by game-theoretic principles, a “policy” rooted in natural law. Since governments have imposed monetary monopolies in the form of central banks, trust has steadily been eroded in their ability to prudently maintain money supplies. Said differently, Bitcoin is the most credible monetary policy in human history disrupting the most untrustworthy monetary policies in human history. A bet on Bitcoin is that the competitive dynamics inherent to the market for money will continue to play out in the same way they have throughout all of history, thus making money supply a matter to be determined once again by the free market instead of central planners.

Armed with these primers on money and Bitcoin, we will now dive deeper into the various principles that comprise Ray’s worldview. Through this exploration, we will gain a more fundamental understanding of history, markets, and Bitcoin. We begin with Ray’s most renowned cultural creation — the idea meritocracy.

Idea Meritocracy

(p.540) “Idea-meritocratic decision making is better than traditional autocratic or democratic decision making in almost all cases.”

At the pinnacle of Ray’s worldview is the cultural paradigm he originated at Bridgewater — the idea meritocracy. As a distinct organizational style, it’s intended to eliminate all barriers to the free flow of information between people — including ego, hierarchy, and personal agendas. An idea meritocracy seeks to align itself with reason and become impervious to politics. As Ray puts it, (p.306) “Power should lie in the reasoning, not the position, of the individual. The best ideas win no matter who they come from.” Essentially, an idea meritocracy is a free market for ideas — a way of filtering ideas via a (simulated) form of natural selection. Instead of charging ranked positions with the authority of decision-making, an idea meritocracy attempts to foster an environment in which the ideas compete freely based on their own merits:

The idea meritocracy: an open environment for the proliferation and combination of the most meritorious ideas, free from manmade impediments such as ego, policy, and hierarchy.

As a free market capitalist, it is unsurprising that Ray developed this approach to organizational culture, as it has proven to be the most effective system for the most people. It was (repeatedly) well established in the 20th century that free markets (capitalism) function better than centrally planned markets (socialism). At the heart of any economic system is the problem of properly adapting resource allocations to the circumstances faced by people at any particular point in spacetime. In other words, the core economic problem is how to best distribute current knowledge of relative value and scarcity. Knowledge is intrinsically superfluid: it resides within many minds and is constantly changing in accordance with the ceaseless interpersonal interactions among individuals and their assessments (and reassessments) of market realities. The challenge of an economic system is to enable quick, continuous, and effective assimilation and dissemination of this knowledge to properly guide entrepreneurial actions.

Naturally, individual entrepreneurs are always most familiar with the prevailing economic circumstances specific to their time, place, and industry. As they see, hear, and touch the productive factors and influences most pertinent to their domains on an almost daily basis, entrepreneurs gain and maintain an intimate understanding of the ever-changing conditions relevant to their chosen occupation. Said differently, knowledge has a localized dimension to it: it surfaces continuously at all points in spacetime where entrepreneurial actions (involving decisions and trade-offs) and economic realities (involving value and scarcity) interface. Therefore knowledge, by its very nature, is inherently distributed among the minds of many. And free markets, comprised of entrepreneurial actions guided by accurate price signals (more on these shortly) are the best assimilators and disseminators of these localized pools of knowledge within an economy. Simply, the free market is a nexus in which many minds effectively become one.

Capitalism is an economic system that deals with the distributed nature of knowledge in a true-to-life, bottom-up way. In a free market, each entrepreneur is unobstructed to operate in his own best interest in pursuit of profits. Contending with the ever-present realities of value and scarcity, the actions of entrepreneurs, like the actions of a pilot guiding his aircraft via his navigational instruments, are guided by the market prices relevant to his profession. This is free market capitalism: a seemingly chaotic bricolage of entrepreneurial decisions, price reconfigurations, and capital flows coming together in a unified orchestration that harmonizes individual and collective self-interests.

For instance, let’s consider the case of Larry the lemon farmer. Being a farmer, Larry is primarily conscious of the cost of fertilizer, soil, and water; and keenly aware of his total cost structure relative to the expected market value of his lemon crop, as maintaining total revenues above total costs is necessary for entrepreneurial survival. Should a drought strike and drive up the scarcity of water, Larry will become aware of this economic reality through the increased price of water which will, in turn, cause him to increase the selling price of his lemons or cut costs elsewhere to maintain his profit margin. Critically, Larry can respond effectively to this drought based purely on the increased price of water without any direct knowledge of the drought itself or its causes. As entrepreneurs choose to buy and sell the various productive factors related to their occupations, the knowledge in their minds becomes encapsulated in and distributed by the prices of these factors to everyone else in the world who interacts with them in the marketplace.

As new experiences provide feedback that change the state of knowledge, entrepreneurs must be left free to rationalize their own economic affairs, take risks in accordance with their rationalities, and operate in an environment free of coercion or violence that would otherwise disrupt their business dealings. Government is intended to be this protective force, which uses its monopoly on violence to prevent violence within society, thus preserving the rule of law and people’s rights to private property. Unhampered, free market competition among entrepreneurs ensures that only those adding value to society can survive and thrive. This principle of non-interference and mutual respect form the essence of true free market capitalism. An excerpt from the masterful essay I, Pencil poetically explains the magic of free markets:

“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles that manifest themselves in nature an even-more-extraordinary miracle has been added: the configuration of creative human energies — millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree…The above is what I meant when writing, “If you can become aware of the miraculousness that I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand — that is, in the absence of governmental or any other coercive masterminding — then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith…The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”

Standing in stark contrast to the economic system of free market capitalism is central planning (socialism). Central planning, as the name implies, means directing an entire economy in accordance with a single unified plan in a top-down, authoritarian, and unnatural way. In a socialistic economic system, a central entity owns and operates all the productive factors (capital, land, and, ultimately, its people) within a society. As such, this centralized body (usually old, stale, and pale white guys) is arrogantly assumed to possess all the knowledge and feedback loops necessary to form a completely (and continuously) accurate representation of the ever-changing economic realities navigated by its society. Whereas the free market is a form of ideological competition (akin to the idea meritocracy) intended to guide entrepreneurial actions consistent with economic reality, central planning is more akin to the ideological totalitarianism (akin to bureaucratism) associated with a traditional organizational hierarchy, where the merits of ideas are given short shrift and underlings unquestionably carry out the orders of their “superiors”.

Being completely misaligned with reality, socialism failed because it is a poor information system: with all productive factors singularly owned and controlled, the price signals necessary for adapting to changing market realities are inhibited from developing. This inevitably leads to the shortages, mass starvation, and societal disintegration commonly associated with socialism. For an acute visualization of the differences in societal vibrancy between capitalism and socialism, take a look at this shot:

This image of North and South Korea at night vividly illuminates the stark differences between opaque central planning in the north, and vibrant free market capitalism in the south.

If we learned nothing else in the 20th century, it is that free markets are better than centrally planned ones in across almost every conceivable dimension. Left to function freely in their natural state, markets consistently generate innovation that increases productivity, lowers costs, and improves quality of life for everyone in society. Just consider for a moment how much innovations such as the automobile, smart phone, and internet services have increased our personal freedoms and enriched our lives. Now consider how un-innovative and un-adaptive government-run functions like the DMV, Post Office, and central banks are. So the elephant in the room, then, is why, in light of overwhelming evidence favoring a free market economic system, do we still tolerate central planning of the largest market of all — the market for money. Again, money is simply a technology for moving value across spacetime. Although it is an ancient (and somewhat, thanks largely to propagandists, enigmatic) social technology, it is hardly different than any of the other things we produce and distribute via free market mechanisms all over the world today.

Coming back to the congruence between the free market and the idea meritocracy, we arrive at two useful formulas. First, the idea meritocracy is comprised of three key elements: In Ray’s words, (p.309):

“Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making”

Now, let’s translate this equation into its comparable free market format:

Free Markets = Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and Hard Money + “Skin in the Game”-Weighted Decision Making

With these equations in mind, let’s now dive into each of their elements to gain a clear understanding of Ray’s idea meritocracy and its relationship to free markets. Once we fully unpack these concepts, we will go deeper into the other principles underpinning Ray’s approach to life and work, using them as filters to more fully observe the potential impact of Bitcoin on all aspects of life.

We begin our journey from the greatest force of freedom in the universe — the truth.


Part 3 will proceed deeper into an exploration of Bitcoin and money through the many lenses of Ray’s individual principles of work and life.