How Much Does a Higgendorfus Weigh?

Michael Green bought Bitcoin at $25. Not because he believed in it, but because he was curious—and because a reducing issuance schedule against a shrinking population had a certain Milton Friedman logic to it. He looked closely, found the logic flawed, and sold.

Mike is a market structure analyst, a derivatives specialist, and the Chief Strategist at Simplify Asset Management. His best-known argument is that passive investing—the dominant force in modern markets—rests on a flawed definition at its centre. Passive funds are never truly passive. They transact every day, driven by inflows and outflows, and that mechanical, price-insensitive buying has quietly distorted the way markets discover value. As a result, the passive-dominated S&P 500, Mike argues, has more in common with Bitcoin than most of its investors would like to think.

In this conversation, Mike walks us through the actual properties that made gold suitable as money—not mystique, but chemistry and weight. He explains why the gold standard kept breaking, what the gold clause was and why FDR’s abrogation of it matters more than most accounts of the Great Depression suggest, and why Bitcoin’s issuance schedule, being arbitrary by design, contains the seeds of its own destruction. He also draws a sharp distinction between Bitcoin as a speculative asset and blockchain and tokenization as genuine technology—one he thinks will eventually transform financial markets, slowly and without much fanfare, long after the current noise has faded.

Mike is writing a book about all of this. The first draft was, by his own account, too angry. The second is in progress. This conversation, or the transcript below, is an early glimpse into it. In the meantime, you can follow his work on his Substack yesIgiveafig.com and on X at @ProfPlum99.

“They never truly are passive. They are always transacting.”

Nicolas: Hi, everyone. I’m here with Marieke Flament, my colleague at Currency of Power. Together we host the Currency of Power podcast. Our guest today is Michael Green of Simplify. Hi, Michael! Thank you for joining us.

Michael: It’s a pleasure. Thank you for having me.

Nicolas: I discovered your work almost six years ago when I heard you on a podcast with Erik Torenberg discussing passive investing, which is a major topic for you. You’ve been quoted widely about market structure and the systemic risks associated with passive investing. Maybe we can start with some background—what was your career like, what got you interested in passive investing and market structure, and what do you do these days at Simplify?

Michael: I’ve been in asset management for a long time. I graduated from the University of Pennsylvania’s Wharton School of Business in 1992. At the time I was more interested in understanding businesses per se, so I went into strategic management consulting with a focus on mergers and acquisitions—the buying and selling of business units within corporations and the valuation work around them.

By the mid-1990s I had accumulated what I imagined was a deep enough pool of expertise to build, along with some partners, a software company called Value Add Software. We ultimately sold to a division that was then acquired by Credit Suisse in the late 1990s. That transition moved me from software that advised asset managers to actually managing asset management platforms. I started in the small cap value space, consistent with my interest in understanding companies, but also candidly reflecting the opportunity I saw at the time—US small cap value, along with emerging markets, had suffered an extended period of neglect.

I was right about the valuation, otherwise I probably wouldn’t be here. Markets moved in my favour for the next couple of years. Then in 2006 I saw similar concerns around overvaluation in small caps, and was fortunate enough to join a firm called Canyon Partners, a roughly $25 billion multi-strat fund. They had been a client of mine since 1995 and had repeatedly tried to get me to join. Finally in 2006 they said, “Is it us or is it Los Angeles?”— which is where they were based. The answer was Los Angeles. My wife hated to drive, my kids were being raised in New York City, and they said that was fine because they wanted to open a New York City office. Over the next eight years I built that to a team of about 15 people managing somewhere around five billion dollars in assets.

I then left to start my own hedge fund, seeded by Soros. Scott Bessent, who is currently US Secretary of the Treasury, was the CIO at Soros at that time—that’s how I got to know Scott. It was an epic disaster, I can’t put it any other way. Performance was actually quite good, but a lawsuit was maliciously filed against me at the start of the firm by an individual who claimed they were owed a piece of the business. I spent the next couple of years fighting it. That experience was actually a touch point when I later joined Peter Thiel—our familiarity with the legal system. I won the lawsuit but lost the war. When Scott Bessent left Soros in 2015, there was something called the “Soros Massacre”, in which the Soros family office, with some degree of vindictiveness, fired all the managers Scott had brought in regardless of their performance. That ended with me shutting down the fund.

In many ways that was a good thing, because it created a period where I was not managing money. Instead I took something of a sabbatical and focused on what I had learned. I was incredibly fortunate that a partner at AQR, Lasse Pedersen, released a paper called Sharpening the Arithmetic of Active Management. In it he highlighted a feature and an assumption of passive investing articulated in Bill Sharpe’s 1991 paper, The Arithmetic of Active Management, which is the source of every piece of commentary you’ve ever heard—that active and passive own the same things in the market, and therefore the only difference is fees.

Lasse’s critical insight was that Sharpe’s definition of a passive investor is someone who never transacts—they only hold. He noted that during periods of index reconstitution, when stocks enter or leave the index, that causes a change in the underlying portfolio that forces passive managers to trade. That was a far more significant insight than most people gave it credit for. It rips apart the edifice of passive investing as a theory, because they are now required to transact.

My contribution was recognising that Lasse had missed another form of portfolio construction change: when an investor puts cash into these funds, that changes the portfolio composition and forces them to transact at the new composition. Since passive funds receive inflows and outflows every single day—mostly inflows—they are never truly passive. They are always transacting. As a result, the entire theory of passive investing rests on a flawed definition at its centre. Once you recognise this, you can build tools and strategies to exploit what is actually a systematic algorithm that simply says: did you give me cash? If so, buy.

Nicolas: The idea being that inflows or outflows send a signal to the market and move supply and demand, and therefore price.

Michael: It doesn’t send a signal per se—or rather, it is a signal, but it is an execute-now signal to the passive strategy.

Marieke: Do you think strategies are evolving because of your work—that people are now building tools to play out what you’ve just described?

Michael: Absolutely. Several things flow from my work, including a much more mechanical reason for the outperformance of passive strategies. They are a little like a surfer who has caught a wave, except that because of the surfer’s popularity, everybody is adding water to the wave, making it bigger and bigger. That is exploitable.

The first place I chose to exploit it was around an event some listeners may know. On 5 February 2018, there was an event called Volmageddon, in which a particular class of strategies imploded spectacularly in a single day. My work had suggested this was highly probable—I had assigned roughly a 95% probability to it, while the market was pricing it at less than 1%. That allowed me both to predict the event and to position my employer at the time, Peter Thiel, to profit from it.

Candidly, it is also something of a gambler’s curse. I won on my first pull of the slot machine and probably became somewhat immune to the complexities that arise when you move from a single security strategy—like the XIV implosion—to an index that contains multitudes. There is quite a bit of difference between the two, and that is really what much of my most recent work has been about: figuring out how to exploit what is happening within the actual index and its flows.

Nicolas: And that is what you do as Chief Strategist at Simplify?

Michael: We continue to build strategies that exploit these phenomena, using them either to protect investor portfolios or to offer enhanced returns. The most recent work has just been commercialised—we rolled out an implementation of it in the high yield strategy I run at Simplify. We are evaluating other areas where we can apply these insights. It is incredibly fruitful and exciting work.

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“A decay factor set by a single individual—and I want to emphasise that.”

Nicolas: As part of Currency of Power—both a newsletter and a podcast—our focus is crypto, the whole context of debasement, the changing world order, and the emerging monetary order dominated by stablecoins, and what some people call the cold war between China and the US. You have been involved in discussions around Bitcoin and gold. Is there a relation between that and your work at Simplify, or is it more commentary on the side?

Michael: It is very much tied in. Bitcoin in particular has been an area of focus as a tradable security. I became aware of Bitcoin very early—2009, 2010—and actually bought some at an average price of about $25, simply out of curiosity. I thought: this is actually interesting because if we think about Milton Friedman’s historical models for building an ideal currency, there would be an issuance rate tied to some metric. Friedman typically thought about population growth; I would more accurately link it to labour force growth. And I was facing a world in which my demographic projections pointed to population growth turning negative over the next 50 years.

That trajectory seems very much in play. More and more countries are following it. I would encourage people to ignore the UN population forecast because of assumptions embedded in it—it currently looks like the global population could peak somewhere around 2035. Since that is within the long-term market framework I tend to use, Bitcoin’s issuance schedule became interesting: maybe this is actually an optimal schedule in the context of a contracting population. A reducing rate of issuance over time.

I fairly quickly concluded, though, that Bitcoin’s issuance schedule was largely arbitrary in its construction. There is a decay factor set by a single individual—and I want to emphasise that. That creates a fragility, and it turns out that it is indeed the wrong issuance schedule.

Nicolas: You mean the issuance schedule—the rule under which Bitcoins are mined up to a cap of 21 million?

Michael: Exactly. The halvings. That decay factor is arbitrary, embedded in the programming itself. It is one of the reasons I have concluded that Bitcoin must ultimately fail. It does create some of the excitement people see around reduced issuance and scarce supply, but it also contains the seeds of its own destruction, because it is an arbitrary metric selected by a single individual. That is precisely why we turn to markets and competition—we want many people to put forward their ideas of what issuance schedules should look like, and we want the right schedule to emerge somewhat organically. There is an inherent conflict within the entire theory of Bitcoin.

That said, these issues are closely linked to my market structure work. Bitcoin, because it has no underlying fundamental cash flow, is actually one of the cleanest abstractions of what has happened to US markets. Most people buying an NVIDIA or an S&P 500 tracker—but what is an S&P 500? It turns out it is a little like Bitcoin: it has a slippery definition. Sometimes it is a technology index, sometimes a financials index, depending on the composition of its components. If you do not actually know what something is, how do you value it? We are consumed by the idea of the wisdom of crowds, assuming that price discovery will emerge organically, without understanding that when we put in place mechanical implementations—like a Bitcoin issuance schedule or automatic 401k contributions into the S&P 500—we are perverting the market discovery process and changing the character of the market itself.

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“If you are going to invest in a Ponzi scheme, you want to invest in the longest-running one.”

Nicolas: Before we go deeper into Bitcoin, I wanted to discuss gold. You have explained in plain terms why gold is deemed to have value. With all the conversations around crypto, we have been brought back to first principles—why does a digital image of a monkey have value, why does Bitcoin? And yet there is this thing called gold, which has had value for thousands of years. Can you revisit that for us?

Michael: Gold is an element on the periodic table. It resides in a region of the table populated by metals, and those metals have certain characteristics. We talk about gold as money, but look at what sits next to it—silver, copper, tin, nickel—all of which have been used in coinage. That is really the critical point for understanding why gold has value.

Gold has unique properties that made it suitable as a large denomination coin in historical periods when we lacked the ability to embed hidden security fibres in paper currency. Gold is very soft, meaning it could be stamped. It does not tarnish because it does not oxidise. And it has a specific atomic weight—which we did not know as such at the time, but we simply called mass—that makes it distinct from any other type of coinage. I can determine how pure a gold coin is simply by weighing it on a rudimentary scale.

That is why it was used as coinage in the ancient world. Most people never saw it because it is relatively scarce, unlike copper or tin, which were also used as coinage but are broadly available and can be distributed at low cost. Gold was expensive and rare. As a result, it played a unique role as the large denomination component that people would covet. But at the end of the day, it was a creation of the state. The king of Lydia [Croesus] was the first to deploy gold coinage—actually what was called electrum, a marriage of silver and gold readily available near Greece where he was based. It was literally a creation of the state, used to settle debts.

And that is what people do not understand about money. It is what they do not understand about the JP Morgan comment from the early 1900s: “Gold is money, everything else is credit.” What he is referring to is a very specific feature of currency—its role is to legally cancel debts. That is all it does. Now, if you are going to have something that cancels debt, that can be a gun or a poison, but it is much more civil to settle with legal coinage, and polite society requires a tool for that.

Nicolas: So the state decided that gold is what we will use to settle debts.

Michael: And they enforced that with the military and police and everything else.

Marieke: Maybe we can double-click on that, because one thing making a lot of headlines is debasement. China is holding gold, more central banks are holding gold. What do you see as gold’s function in this particular moment, and as something that helps preserve reserve currency status?

Michael: What is happening in gold right now is broadly similar to the narrative around Bitcoin for an extended period—it is a mechanism that allows you to step outside a state-based system, precisely because so many other states continue to recognise its value. You will incur a large cost if you liquidate your assets, convert them to gold, transit across a border, and try to re-liquidate in a safer regime. But that is really what people are trying to use it for. We now have electronic versions of gold, just as we have Bitcoin, that people use to speculate, and that is really what is behind most of the latest moves in gold.

Most Americans, myself included, tend to assume we sit at the centre of the universe. But what is driving gold right now is not primarily what is happening in the United States. Gold investors should be paying far more attention to China, where we saw physical premiums for gold and a massive dislocation of a silver ETF from its underlying—suggesting China was actually the locus of the last major move. The break we have recently seen reflects some of that speculation being unwound after the Chinese government placed limits on leverage and trading in these vehicles, ending a Western arbitrage that was draining reserves of silver and gold to satisfy contracts in China.

Longer term, is there still a broad fear of debasement? Yes. And debasement is really important to understand in the context of the history I gave you. It is very hard to debase gold because of weights and measures—this is one of the core tools almost all governments have. Napoleon, for example, introduced the Mesures usuelles system in 1812, which gave us the metric system. There is a gram and kilogram weight sitting somewhere in Paris that is the exact measure of those quantities, and we have scientists trained to use atomic systems to get ever more precise, because the measurements actually matter.

In old times, if the government was clipping corners off coins and re-melting them to make additional coinage, the coins got smaller, and you could detect that through weighing. It is much harder in a digital world, because we have to track how much coinage the government is issuing relative to a forward unknown. What are tax receipts going to be? So it is both easier to get caught up in a narrative around debasement, and in many ways harder to validate it.

Nicolas: Because today we do not have a gold standard. No state has issued a decree that gold is worth a fixed amount. It relies entirely on market forces.

Michael: Market forces. Yes.

Nicolas: I have an anecdote about that. I was at an event in London where Anatole Kaletsky, chief economist at Gavekal, was on a panel about debasement, inflation, and the best hedge against it. They did not mention crypto once. Afterwards I asked him why—in tech, everyone is betting on crypto as an inflation hedge. His reply essentially was [my words]: “Bitcoin is a Ponzi scheme that has been going on for 15 years, and gold is a Ponzi scheme that has been going on for thousands of years”. I understand he would rather have his clients buy gold.

Michael: I think that is broadly correct. At the end of the day, we are talking about secondary claims largely established by speculators. And to his point, if you are going to invest in a Ponzi scheme, you want to invest in the longest-running one.

Bitcoiners will call this the Lindy effect. But it is actually quite interesting that you can identify a period in the United States when Bitcoin briefly surpassed gold in that framework. The younger, more tech-forward generation, misunderstanding what gold was—understandable given the misinformation flowing across YouTube and crypto channels—decided Bitcoin was better. We actually saw gold trade off relative to Bitcoin as that substitution was theorised.

What people did not understand about Bitcoin is that, unlike gold, it has a maintenance cost. You have to keep the network running, or your self-custodied Bitcoin simply becomes a flash drive worth a nickel rather than a hundred million dollars. Gold does not have that property. If I stopped all gold mining, if I stopped all commerce, gold would still remain gold. Would it have value? That is open to debate. But at least it would remain gold. Bitcoin does not have that property. It is an incredibly fragile construct that requires people not only to continue believing in it, but to actively invest in it.

Marieke: And to keep mining it. Which leads to another argument we hear more and more—that Bitcoin represents energy, and therefore energy is the new basis for money.

Michael: That is just a narrative. You are being sold something. Energy is not an asset you hold; it is a liability—an obligation you are assuming somebody else will perform. If they do not, your Bitcoin becomes worthless. So what is the actual energy content of that Bitcoin? Zero.

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“How much does a Bitcoin weigh?”

Nicolas: Do you have views on why gold standard regimes have broken down multiple times in history? We had the gold standard, then it broke. We tried to reinstate it at Bretton Woods in 1944, and it broke in 1971. Karl Polanyi’s The Great Transformation argues that the attempt to restore the gold standard contributed to World War II by imposing rigidity on the economy. Can you explain why gold is still less rigid than Bitcoin—you can still mine more gold, there is no hard cap—and yet the gold standard always broke eventually?

Michael: There are a couple of factors. Gold had a unique role in cancelling debt. The real event people should pay attention to in the 1930s was FDR’s abrogation of the gold clause, which was a private sector contract option on behalf of lenders allowing them to demand payment in gold on the terms at which the contract was entered into. This was an explicit debasement-curing clause, an outgrowth from the US Civil War, during which the US government issued greenbacks that became deeply devalued relative to gold. Bankers were therefore able to insert into private contracts a clause allowing them to demand payment in gold.

In a fiat or paper currency system it is hard to validate whether the forward claims—the taxing capability that gives the currency its ability to cancel future debt—are actually sound. As a result, credit tends to get extended significantly relative to the quantity of currency that borrowers can actually earn. That is what we call a default: when you cannot make the payments.

What led to the collapse of the gold standard in the 1930s was that the amount of credit subject to the gold clause had risen to roughly $100 billion, while there was only about $1 billion worth of gold in private hands. Nobody could actually settle their debts. That produced a debt-deflation and a credit crisis, with credit values falling sharply as people discovered those claims could not be met. The credit itself had served as collateral for other borrowings, which were then impaired—and that collapse across asset values and collateral is what we call the Great Depression.

Similar panics occurred earlier: 1907, and 1873, which involved the demonetisation of silver. The recurring pattern is that credit gets extended, the means for settling that credit prove inadequate, and the result is a collapse in asset values and an unwinding of the credit cycle.

One way to deal with that is to declare that every dollar is now worth less, but can still be used to cancel debts. That is effectively a debt jubilee. If it is done through debasement, those who hold currency are the most adversely affected. Those who hold creditor claims can see an improvement in their condition if their primary concern is return of [nominal] capital rather than perfecting the [real] claim. That means junior claims in a capital stack tend to benefit most. Equity, as the residual—even below junior debt—benefits most. It is the derivative tail on that trade. And that is what we see every time we resolve a credit tightening: the junkiest equities, the junkiest credits, the worst quality stuff, when the system is then flooded with liquidity, tend to radically outperform because they have effectively been granted a new lease on life.

Unfortunately, things like Bitcoin are incredibly fragile to those events precisely because they rest on a fundamental misunderstanding.

Marieke: Hearing how you framed the 1930s, it is almost impossible not to look at where we are today and see some of the same patterns. What parallels do you draw, and what does that mean for where things are going?

Michael: The most important one is a breakdown in what is called the wisdom of crowds. Index investing, efficient market hypotheses, the various theories of how markets work—almost all of them presuppose something mistakenly equated with Adam Smith’s invisible hand, though that is actually a different mechanism. What they really describe are mean-reverting discovery machines that alternately over- and under-price things, with speculators serving to guide prices towards fair value.

That works well when we all understand what we are actually trading. When I say NVIDIA, I think of a stream of cash flows generated through the sale of semiconductors and ancillary services, and I can evaluate whether the prospect of those cash flows justifies today’s price. But if NVIDIA is just a ticker on a screen and I have no idea what it is, I have no mechanism for judging whether it is overvalued or undervalued. I am relying entirely on other people to do that work.

I did an experiment on Twitter to illustrate this—it will appear in the book I am writing. I repeated the famous experiment of Francis Galton that established the wisdom of crowds: a county fair in rural England where fair-goers were asked to guess the weight of an ox. Galton’s hypothesis was that random members of the public would produce worse forecasts than educated experts. He was stunned to find the collective guess came within one pound of the 1,700-pound ox.

I put the same question to Twitter—how much does an adult ox weigh?—and got a log-normal distribution centred right around 1,700 pounds. The participants knew what an ox was and had some basis for thinking about it. I then asked how much an adult higgendorphus weighs. A higgendorphus is a fantastical creature of my own invention. That same contest produced a U-shaped distribution heavily weighted to the tails, because nobody could say with any confidence: I have seen a higgendorphus; there is no way it weighs 3,000 kilograms.

How much does a Bitcoin weigh? It is a distribution that naturally lends itself to extreme moves in either direction. This is why, when people point to Bitcoin surviving 90% drawdowns, my reaction is: of course, because once it draws down 90%, the only remaining participants are those convinced it is a giant thing. It rapidly swings back until it hits the logical limit where the cost of maintaining the network exceeds the value of securing it, and the system breaks down.

Marieke: Very interesting. Prediction markets are becoming more prevalent. Do you think they help change how investing is done—that they better reflect the wisdom of crowds?

Michael: They can. And this is unfortunately one of the great problems of our time: there is always a little bit of truth to things. Bitcoin—a reducing level of issuance against a population that is not growing nearly as fast. There are seeds of Milton Friedman in it. I took a position, examined it, and realised it does not do what I thought. It has the seeds of its own destruction. Do I wish I had held all of it and become fantastically wealthy? Sure, who does not want to be a billionaire. But it is more intellectually satisfying to have solved the problem. That is what actually motivates me—the intellectual curiosity. And I have been fortunate that the money has by and large followed.

The simple reality is that people are slowly finding their way to the fundamental value of the system, which is unfortunately negative.

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“Two out of three kill shots not enough for you?”

Nicolas: Coming back to the collapse of the gold standard—you said it collapsed essentially when there was too much credit compared to the volume of hard currency. But is it not also true that a lot of credit reflects productive investment and entrepreneurial activity? Is excess credit not also a feature of a growing, productive economy?

Michael: It is an interesting question. The existence of credit is a good thing—credit is an asset, a claim I hold against you. Where credit breaks down is when I have improperly forecast your ability to repay. That can occur because you have misrepresented yourself—fraud. It can occur because the business ventures you described failed to materialise. It can occur because so many people saw the expansion of credit and forecast an environment in which asset values would rise enough to settle those debts regardless of business prospects—that is what collateral is.

Excess credit means nothing to me except against a forward unknowable outcome: how much do we have to settle those debts? And ironically, one of the tools we use to settle debt is the issuance of new credit. I can take credit from bank B to pay off bank A. When we enter a credit cycle, I am uniquely exposed if I have to rely on bank B to repay bank A, and bank B says: we are not lending right now because things are bad.

So when you talk about excess credit, there is no right answer. If in the process of funding investments we make radical discoveries that dramatically improve human productivity and increase the quantity of goods and services available, then maybe that was a very good thing. Credit transfers resources from the future—the obligation to repay—to the present—the need to invest.

Much of my work boils down to what I call financial primitives: currency exists to cancel debt; debt exists to transport resources across time; equity is the residual, measured in currency. That creates a trinity that constitutes our entire financial system. We also have a unique entity called government, which can inject additional currency into the system when it determines that the social ramifications of a widespread credit-driven change of control are too disruptive. That is what those worried about hard money are really reacting to: the degree of restraint with which that external player respects the rules under which contracts were entered into.

Marieke: Maybe before we move on to Bitcoin—you mentioned a book. What is the thesis?

Michael: The book is about the impact of passive investing. It is called The Greatest Story Ever Sold—not told, sold. It covers many of the things we are discussing right now, with a sharper focus on markets and their implications.

Marieke: A good segue, then, into the greatest story ever sold. Can Bitcoin replace gold?