Chapter 2. Entropy and the Physics of Capital

People typically approach Bitcoin from a financial or technological perspective. However, Michael Saylor explains Bitcoin from an entirely different angle — through the lens of physics. He argues that we can understand Bitcoin's essence through the concept of entropy, a principle from physics.

A World Governed by Chaos

In financial markets, chaos is generally perceived negatively. Most investors seek stability and try to avoid volatility and disorder. Saylor, however, turns this conventional wisdom on its head. He explains that chaos is actually the source of Bitcoin's power.

Saylor's Thoughts

"When you take your money and put it in a bank and save it in a fiat currency, you're loaning your money to a country. When you take your money and buy a stock, you're loaning your money to the management team of a company. When you take your money and buy a building, you're loaning your money to the mayor of a city. When you take your money and buy a piece of art, you're loaning your money and investing your money in a culture.

But when you actually buy Bitcoin, you're loaning your money to the Lords of entropy. You're loaning your money to the gods of chaos. What's the bet? The bet is that chaos will outperform cities, companies, countries, cultures. It's a profound idea.

I place you in Europe before World War II. I give you a lot of money and I give you a choice. You can buy any piece of land in any country, you can buy any building, you can own any company in Europe, you can own art in Europe, you can invest in the currencies and the bonds of Europe. Imagine I give you a choice of buying any asset in any nation that's about to be a combatant in World War II, or you can own the one bank in Switzerland that's going to hold all the money of all the combatants.

And you see, if you own that Swiss bank and everybody puts their money in the bank and the war comes — the chaos — and entropy accelerates in four years, what you realize is every building is risky, it may be blown up. Every company will probably collapse. Any piece of land may or may not have value. The rents and the rental contracts will probably be torn up. The currencies will all collapse.

And in fact, the more chaos, the more destruction and devastation, the more valuable that one bank becomes. In fact, if everybody puts their money in the bank and they all kill each other, the bank keeps the money.

It's a very profound idea. Are you in the business of benefiting from chaos or are you in the business of attempting to stop it? The law of thermodynamics says you can't stop entropy. The more confused a government is, the more inefficient the mayor is, the more inefficient and competitive a corporation's market environment is, the more chaos and the more change in the culture, the worse all those other investments are and the better the Bitcoin investment is.

Bitcoin is powered by chaos. It's going to continually outperform everything else because the one truth in the universe is that entropy goes in one direction. Chaos will continue.

Walk into a casino. It's rigged. Every game is rigged against you, maybe with the exception of poker. And when you sit down at the poker table, if you're not the professional poker player, that game's rigged against you too. Bitcoin's the only game in the casino that we can all win."

Implications

Saylor's chaos theory provides an entirely new perspective for understanding Bitcoin. Most traditional assets try to preserve value through stability, but Bitcoin actually creates value through chaos.

This is especially significant in today's world of increasing uncertainty. Traditional assets are vulnerable to political instability, economic turmoil, and social change, but Bitcoin actually becomes stronger amid such chaos. Like antibodies that grow stronger by fighting viruses, Bitcoin evolves and grows through its interaction with chaos.

The Flow of Energy

To understand Bitcoin, Saylor explains that we need to view capital flows as energy flows. He argues that capital always tends to flow toward more stable and efficient states, just as water flows from high to low ground — a law of nature.

Saylor's Thoughts

"Imagine there's a mountain lake with 500 trillion gallons of water. Even if I don't know how it got there, the water is there. The water is chilly and clear. And if I look down, there's a waterfall. The waterfall is beautiful and shows fierce turbulence. The water in the lake is calm, but the water in the waterfall is turbulent.

If you're a tourist, you might say, 'I don't know why the water falls downhill. I don't know if it will keep falling downhill, and I don't like this volatility.' Then you'd just take a selfie in front of the lake, go swimming, get cold, and leave.

But what if you're an engineer? You'd look at the same lake and waterfall and think about gravity. You'd think about the sun. You'd figure out how the water got there. The sun shines on the ocean, the water evaporates to become clouds, wind pushes those clouds against the mountain. The clouds condense and rain, and that rain runs off the mountain and into the mountain lake.

And then you'd think, 'What if I created a dam near that waterfall? I could build a dam, put a turbine on it, and channel a billion gallons of water through the dam, drop it 60 feet, and plug that into a hydroelectric power plant. I could spin the dynamo, make electricity, and then run the electric power line to a village down in the valley and light up the village or the city.'

Someone who doesn't understand physics might come along and say, 'Good idea, junior, but what are you going to do when the water stops flowing downhill?' I'd say, 'Well, I actually think the water's flowing downhill because of gravity. Newton solved that for me.' And then someone else might say, 'Good idea, junior, but what are you going to do when you run out of water in the lake?' I'd say, 'Well, there's 500 trillion gallons, and if I take out my calculator, a billion gallons — or whatever — it's going to last a long time.'

Bitcoin is similar. The $900 trillion of capital is like that water. And this capital is constantly trying to flow to a more efficient state. Just like water flows from a mountaintop to below, because it's a lower energy state."

Implications

Saylor's water flow analogy explains that the flow of capital into Bitcoin is not mere speculation or a temporary phenomenon, but an inevitable process similar to natural laws. From his perspective, Bitcoin represents the "lower energy state" that capital naturally flows into.

His engineering perspective is particularly significant. Just as tourists fear the waterfall's violent movements, many investors fear Bitcoin's volatility. But engineers know they can use this energy to create value. Similarly, Bitcoin's volatility, when properly understood and utilized, can become an opportunity for new value creation.

War Against Entropy

Saylor explains that all assets are at war with entropy. Entropy is a physical concept representing the degree of disorder or chaos, and energy tends to disperse randomly over time. He argues that while traditional assets inevitably lose in this war, Bitcoin is the only asset that can win.

Saylor's Thoughts

"Inflation is just the tip of the iceberg. Financial assets' value is diluted not only by inflation but also by tariffs, tolls, torts, transfers — all sorts of taxes. Every time you move your capital, it gets taxed.

And if taxes and torts don't undo you, you've got weather, competition, obsolescence, politics, catastrophe. These are the things that dilute the value of your capital over time. If you want to maintain economic energy, you have to fight against that friction.

Most people realize this is a frustrating endeavor and it's a no-win endeavor, so they give up on financial assets and start turning to physical assets to preserve capital. But a Ferrari is not a good way to keep your money forever. After 5 years, you've spent as much on insurance, upkeep, and depreciation as it's worth. A home in Miami Beach? If you buy a $10 million house, you better come up with $10 million to maintain the house over 17 years. Now you've got no money left.

Politicians are very creative. They've got city taxes, county taxes, state taxes, federal taxes, transfer taxes, usage taxes on the property. And if that doesn't get you, there's rent control, price control, or a culture shock. Then you've got competition, you might get discriminated against, there's recession, the currency can collapse, your tenants won't pay you, someone will slip and fall on the front sidewalk and sue you."

Implications

Saylor's entropy analysis questions the concept of "permanence" we take for granted in assets. From his perspective, all traditional assets are governed by the law of entropy, which inevitably causes them to deteriorate and lose value over time.

He particularly describes the multi-dimensional entropy that physical assets experience. Beyond direct costs like depreciation and maintenance, countless factors like taxes, regulations, social changes, and natural disasters gradually destroy asset value.

This suggests another condition that perfect capital must fulfill: resistance to entropy. Bitcoin exists outside the physical world, making it immune to such entropic influences. This is a key reason why Bitcoin can become "perfect capital," according to Saylor.

The Thermodynamics of Capital Preservation

Saylor explains the problem of capital preservation from a thermodynamic perspective. He especially uses the Second Law of Thermodynamics to explain Bitcoin's revolutionary nature, offering a solution to the limitations of the existing financial system.

Saylor's Thoughts

"The Second Law of Thermodynamics that I learned at MIT goes like this: 'You can't win, you can't break even, but you can't get out of the game.' All systems increase in disorder over time, and usable energy decreases. But we don't want to lose. So we started thinking, 'What if we could find a way out of the game? Then we could break even, then we could win.'

Satoshi found a way. He gave it away, and he went away. Through Bitcoin, we can for the first time bypass the law of entropy. All assets in the physical world corrode, incur maintenance costs, and lose value over time. But Bitcoin is different.

Bitcoin is perfect digital capital in cyberspace. It doesn't corrode like physical assets, costs almost nothing to maintain, and actually increases in scarcity over time. It's like we've invented a perpetual motion machine that defies the law of entropy.

Furthermore, Bitcoin eliminates all the friction that other assets experience. There are no restrictions on cross-border movement, no need for government regulation or bank intermediation, and no one can physically seize your Bitcoin.

This is why Bitcoin can be perfect capital. Bitcoin isn't just a digital asset. It's the first entropy-resistant capital humanity has created, marking a breakthrough in the history of civilization."

Implications

Saylor's thermodynamic analysis provides a scientific explanation for Bitcoin's revolutionary nature. From his perspective, Bitcoin is more than just a technological or financial innovation. It's a breakthrough invention that allows us to bypass the law of entropy for the first time.

Particularly noteworthy is his view that Bitcoin provides a way to "get out of the game." All existing assets were trapped in a "game" where value inevitably decreases over time. But Bitcoin changed the rules of the game itself. By escaping the constraints of the physical world, it bypassed the law of entropy.

This perspective also offers important insights into Bitcoin's long-term outlook. If Bitcoin truly is the only entropy-resistant capital, then the value of all other assets will inevitably flow into Bitcoin in the long run. This provides a scientific basis for predicting Bitcoin's sustained value appreciation.