Bitcoin | Acquired | ListenLeap

This is.

This is the key line.

This is a quote from coin daddy.

Right now, all our entertainers come from outside crypto culture, not inside crypto.

We've got to change that.

He said oh my god, what a mission to be on.

What a mission.

Welcome to Season 8, Episode 1 of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.

And I'm David Rosenthal, and I am an angel investor and advisor to startups based in San Francisco.

And we are your hosts.

And while today's topic is nowhere near a corporation and is often thought of as quite the opposite, it has had a better investment return over the last decade than any company in the world, including Amazon, including Apple, including Domino's Pizza and even including Tesla.

Oh, so great.

We're going to have to talk about a little bit of pizza as we get along here.

We are, but not from Domino's.

No.

Today we are talking about the single greatest 10-year investment return in human history, Bitcoin.

And in just over a decade it has gone from less than one cent per Bitcoin to over 30000, a 3 million X investment return.

That's just mind-blowing.

Yeah.

I was going to say David, I don't know totally for sure that it's the single greatest decade investment return in human history, but it kind of has to be.

I just can't.

Both of those were like between 20 to 30 million that turned into like 100 to 200 billion.

So even that's like what a thousand X ish.

Like it doesn't even come close.

Yep.

Pretty crazy.

I have not computed the IRR, but I bet that's pretty good too.

So, whether you are hodling on for dear life and riding it to the moon, or whether you think this whole thing is a crazy bubble that's about to pop, there is no denying the unbelievable cleverness of invention of all the math and mechanisms behind the Bitcoin protocol itself.

It is truly a beautiful and ingenious system.

But by who?

We don't even really know who invented it.

Today, David and I will dive into the complete history behind the creation of Bitcoin by the pseudonymous Satoshi Nakamoto, the different factions that pushed it to evolve, through its several chapters since 2009, into the mainstream today.

And we'll evaluate its position today with the same strategic lens we use on every episode here at Acquired.

Is Bitcoin a new form of money, an investment opportunity, the start of a new global economy, or just completely a scam?

Today, we dive in.

Well, if you love Acquired and you want to be a deeper part of what David and I do here, you should become an Acquired Limited Partner.

That was back when Bitcoin was under $20,000.

Yes.

And also listen live into our book club discussions with the authors.

Most importantly, though and this is what's so cool about what the show has become you'll be a part of the acquired community.

We've been amazed at the caliber of people and insights that have showed up to our LP calls.

Thank you so much for having me.

People have made friendships, gotten jobs, raised capital, launched new careers and even met their co-founders through the Acquired community.

So if you aren't already an LP, click the link in the show notes or go to acquiredfm slash LP and we can't wait to see you there.

All right, listeners, now is a great time to thank a new friend of the show, Koifin.

And it's funny, they're new, but actually I've been using their product for years.

My research project for every single new acquired episode involves Koifin.

So when they reached out to sponsor the show, I thought, well, this is convenient.

Indeed.

So Coifin is a financial research tool loved by both individual investors and financial advisors.

Individuals use it for stock research, graphing financials and portfolio tracking, and financial advisors use it to build model portfolios and create client proposals.

They have live market data and powerful analytics tools.

So it's kind of like a Bloomberg terminal, except without the huge price tag, right?

Yes, essentially.

It's a web app, and it's totally self-serve.

I've actually not talked to anyone at the company for the first few years that I used it.

So Koifin is a product that the broader market, like all acquired listeners, would use, not just Wall Street investment bankers.

It's where I pull things like growth rate or gross margins or the PE ratio or revenue multiples for every company we study.

And you can compare these things over time with historical graphs or against other companies.

It's often what I use when we're studying private companies too, like Rolex or Mars or Ikea, to look at the comparables, to estimate what these companies would be worth if they were public.

They also have a screener that lets you filter across thousands of stocks, so you can quickly surface investment ideas.

Yep.

So the general idea is, if you're someone who's used to living in data, you should have that at your fingertips as you think about investing.

Exactly.

It's got these great graphs for data visualization wrapped around institutional grade data.

So if you want to understand what assumptions are baked into the stock price today, Coifin is for you.

I was about to say that acquired listeners have a great offer.

But Koifin's free product is actually already really robust.

Which is what I was using for years.

I know, I know.

But indeed for Acquired listeners and also for you, Ben.

If you go to koifincom slash acquired and you end up upgrading to paid, you'll get 20 off your first year.

Our thanks to Koifin.

That's K-O-Y-F-I-N dot com slash acquired or click the link in the show notes.

Well, David, I think it is time to dive in.

And listeners do know that at various points in our lives, past and present, David and I have bought Bitcoin, sold Bitcoin, hold Bitcoin.

Hodled Bitcoin.

None of this, as usual, is investment advice.

Don't take this as a recommendation to buy or not buy.

In fact, I have learned way more researching in the last two weeks and really preparing for this episode than I ever knew, when I held more Bitcoin than I currently hold now.

So Certainly not investment advice, but definitely a fascinating deep dive.

And hopefully we'll both turn up some new stones that you didn't know, even if you're a Bitcoin enthusiast and also help see the forest through the trees a little bit if you are someone that's deep on all this stuff.

I mean when we were planning this season and thinking about the stories we wanted to tell, like there was no better story that I could think of to start the season than this.

In fact, I fought you on it.

So I'm glad you pushed it through.

All right.

We are going to set a new record on where we start on history and facts today.

But it's not going to be a record in the direction you think.

We're going to start.

I never really thought about it.

It's what I do.

I go on the IRS website.

I go on the California Franchise Tax Board website and enter my bank account info and pay the taxes.

But this time, I found it very, very concerning.

I'm dramatizing for effect here, but I actually woke up in the middle of the night, Monday night, thinking about this.

And I was like, I'm really worried about what I just did.

Why is that?

Well, I'm not worried that I paid my taxes.

I certainly believe in paying taxes.

It's important.

You should do it.

I'm concerned how I paid my taxes.

So when I logged on to these websites the IRS website, the California franchise tax board website they kind of feel like they were designed in 1995 and they probably were and I, you know, went on.

I was going through the flow, I entered my bank routing number and I entered my account number and I told them to you know, take out many thousand dollars from my account.

And And they just kind of did.

They just sort of reached into my account and they took the money, which I wanted them to.

I wanted to pay my taxes, but that's insane.

I didn't log on to my bank and tell them this was going to happen.

I just gave out my account number and they came and they took the money.

Now, I trust the government and I think that's okay.

But I started thinking about all the times...

I do this.

Right.

Like if they could do that, I mean, the routing number is just the branch.

So like you and I could foreseeably have the same routing number.

So all I need to do is either find or guess your account number, which is not very secret.

No, like I actually give it to a lot of people.

And the more time we spend on the internet and transact and we build acquired like we have our bank account at acquired we have vendors.

We have people who pay us.

We're giving out our account number all the time.

There's really nothing to stop anybody, once they have the number, from sharing it, using it, taking money, doing kind of whatever they want with it.

That's kind of frightening, isn't it?

Totally.

Like, once you start pulling on that thread, it's almost scary to see where it goes and what the layers of our financial system are.

I imagine that's where you're going with this.

Yeah, that's exactly.

Well, yeah.

So then I was like, well, How else could I transfer money?

I mean I could write a check.

But you write a check, then that's a piece of paper that has the routing number.

You're just making the problem worse.

It has your name on it.

It has your address on it.

So literally everything you need to steal somebody's identity and their money is just right there, printed on a piece of paper.

What do we also use?

We use debit cards and credit cards to pay for anything.

How many times have you had your credit card stolen, Ben?

Because I've had my credit card stolen probably three or four times over the past 10 years.

Yeah, something like that.

I'm sure everybody listening is probably in the same bucket.

If somebody knows your credit card number and you don't even have to, even if you're really careful with it, you could be paying at a gas station.

There could be a skimmer installed.

An e-commerce website you use could get hacked.

It's out there.

There's no way to stop anybody then from putting fraudulent charges on your account.

But David, fortunately, these systems account for this.

Take a credit card company, for example.

We did the Venmo episode.

We talked about the credit system.

Those companies make a ton of money building in transaction fees to account for all the fraud that they have to deal with.

Because these systems are silly, much like our social security number, where everybody's secure identity is what is it?

A nine-digit integer.

Like, yep, call it good.

No one will guess that.

Well, they are hard to guess.

And of course, we're We're dramatizing here.

And there are these financial institutions that are banks or credit card companies, et cetera, that are in the middle of all this.

And they're monitoring our accounts and they're looking for fraudulent transactions that show up and they're canceling them.

They're not allowing them through.

But like this is a huge tax on the system.

So there was in 2018, there was $28 billion of credit card fraud in the U.S., Plus, there are estimates there are another $50 to $60 billion in financial bank fraud, wire fraud, kind of generally more broadly, not to mention chargebacks, which when merchants try and put a charge through on a credit card and the credit card company denies them, there are charge-offs, there's everything.

There's all the work that all of these institutions are doing to prevent fraud, all the technology they're buying, all the people they employ.

This is kind of a lot, right?

It's kind of crazy.

So why does this happen?

It happens because the account number is everything.

There's only one address.

It would be like, once that address is out there, you can access the account.

It'd be like with our email.

If I knew your email address and I email your email address, well, I could also just send...

Email is you, right?

Like it doesn't kind of make any sense for the internet.

Okay.

So what if I told you there was another system out there, something that was natively designed for the internet that works just like email?

You can give me your address.

I can send you money, but not take yours.

Nobody can charge back that transaction or invalidate it or claim that there's any fraud, any of that.

Does that sound interesting?

Does it sound like it might be valuable?

Tell me more, david.

Indeed, we will all right.

Well, that was fun we're gonna get.

We're getting ahead of ourselves for sure.

Of course we're talking about bitcoin and of course we're talking about the limitations of the traditional financial system which, to be clear, is amazing and is one of the most incredible developments of human history.

But it wasn't built for the internet.

It was built for an age when you know the way that most people live their financial lives is once a week or more, maybe even once a day.

They went to a building with somebody who called a bank, with somebody who knew them there, that they took out money out of their accounts, and that person was like yes, i know who you are, i can verify your identity, i'll give you the money that building.

Those people were processing checks that you were sending.

They knew what was happening.

It wasn't built for the internet.

Right, and the most important thing for this system, the number one goal is that it keeps working.

So you can see why it just keeps happening this way because it works.

It is the foundational underpinning of our economy democracy.

You know the the system must keep working and sure, we've layered on all kinds of crazy hacks over the years to make it work the way it does, but i'm a fan of it continuing to operate the way that it does without breaking.

So I see why it just keeps on keeping on.

Yeah, exactly.

So how do we get here?

So modern banks started.

Now we'll go back to the history started back in the 14th century, during the Italian Renaissance.

Here we go.

Many great things happened.

Here we go.

I think it was the Renaissance when double entry bookkeeping was created.

I don't know for sure, but I think that was one of the main innovations of the financial system.

Here I am shocked that you're not taking us to seashells for currency.

But all right, let's just start with banks.

That feels a reasonable enough place to start in this story.

So that was when banks started.

And they would take deposits, they would put out loans, they would do other services like money changing between regional currencies, transferring large sums of money, etc.

Then in England, in the sort of late 1600s that's when banks started issuing paper bank notes, bank notes, so that people didn't have to carry around you know whatever metal the currency was denominated in, you know silver, gold or silver, seashells or whatever um turned out.

That was a pretty good idea.

And when you say so that they don't have to carry around the gold or silver or whatever that the bank knows, basically just say like i, i have this much gold but it's at the bank and here i'm just giving you a piece of paper that lets you know that i've got, i'm good for this gold.

You can use this piece of paper now.

You're good for that gold At the bank.

And then, pretty quickly, governments got involved and they were like, oh well, why don't we just keep the gold at our central bank?

And then all these other banks in our jurisdiction.

They can put out paper bank notes, but it ultimately come back to us.

Then we don't have all this metal going around.

Great.

By the way, that also allowed them to then inject money into the system and help finance their own spending as governments.

But we'll get to all that later.

So then, from banknotes it wasn't a big leap to checks which the banks would create on special tamper proof templates and paper that would then come back to the banks for verification.

Tamper resistant paper.

Yeah, tamper resistant.

And of course, there was fraud throughout all this.

But again, like this is like, You know, a local town, a local city.

Everybody knows each other.

All these pieces of paper are coming back to the bank.

They're verifying the system works pretty well.

And then that grew up into clearing departments.

It was clearing departments of banks that would. clear these checks and that got aggregated up into sort of local geographies and then ultimately countries of clearing houses and then with the advent of computing in the 20th century in 1959 in america the automated clearing house or ach system gets implemented and that was a national system is a national system that all of these payment wires and checks come to and they take batches of them every couple days they process them automatically using computers also imagine what a crazy cool system that would have been in 1959 that just because i have your bank information i can send you money via the automated clearinghouse and it will just show up three to five days later in your account like magic i mean that three to five days without me doing you know writing a check like that's freaking awesome It's amazing.

It leads to things like direct deposit for employees from their employers, transferring money between business to business, enterprise applications.

This is all great.

But as you say, Ben, it still takes three to five days.

This is a batch processing system that's grabbing a lot of transaction data and pieces of paper and pushing it out every few days.

25 years before the Macintosh, I will take it.

35 years after the Macintosh, maybe it's weird that it's still the system.

Yeah, indeed.

Well, so then, you know, for consumer use cases like that, like that's not going to work.

You want to go out and eat at a restaurant.

You're probably still carrying around your bank notes, your green bucks in America or other paper currency in other countries.

Well, so then people come up with the idea of like, well, how can we make that faster?

Credit cards.

Credit cards started with Diners Club was one of the first.

Yeah.

And then I didn't realize this till doing the research.

Do you know where Visa started?

So Visa was the first big credit card network.

Is this the one?

There was a department store one.

Was it Macy's or Sears?

No, no.

Maybe that was Discover.

So Visa was actually Bank of America.

Oh.

They started it in Fresno, California.

They picked one town and they just mailed all of their Bank of America customers in Fresno California, these credit cards.

Whoa.

And people liked them.

It started to work.

And then other banks wanted to get in on this action.

They ultimately started a consortium of other banks with.

They called it Master Charge.

That became MasterCard.

And thus you have Visa and MasterCard.

But credit cards, as we all know, have a couple problems with them.

One, it's debt.

So the way that you can make payments happen really fast out in the wild is not actually do the payment.

It's just on credit.

So that leads to consumers that start using them.

Many of them start racking up a lot of money consumer debt also an enormous consumer, like cfpb problem in our country today, the consumer financial protection bureau that this has been wildly abused and many many, many americans are in credit card debt because frankly, the system has taken advantage of them.

I do think, as you're pointing out david, it is very counterintuitive to me, but it's crazy that it evolved this way that credit cards came before debit cards because we had ach to literally move money around, and But when we wanted instant payment, basically these stores or banks would just extend you the credit and then they didn't have to move the money around right away.

They could sort of do it later, which sort of explains before the debit rails were laid which I'm sure you're about to get to like how you could have these instant payments even before we had a debit system.

Well, there's one other problem though, with the credit system, which is for merchants.

You know it's good in that they get to accept easy payments from lots of people customers.

They can probably do higher dollar value transactions without checks, you know they can.

They can get more volume coming through whatever they're doing, whether they're a restaurant or a retailer or whatever.

But the problem is they don't get the money right away.

So, like if you're a merchant, you're taking credit cards, not only do you have to pay a fee to the credit card companies 29 percent plus 30 cents plus 30 cents right but also you just don't get the money right away because it's all on on credit.

You got to wait a month.

So that's not great for your cash flows if you're a struggling restaurant or retailer or the like.

In fact, it's a little bit of a hostage situation.

Like if the consumers weren't demanding.

I must be able to pay in this way because every other store is letting me.

If you came to me David, and you're the credit card company and I've never heard of you before and you're saying, by the way, you should start accepting the payments through me.

I'll get it to you a month later and I'll take a nice spiff along the way.

I'd be like, get the hell out of here.

Yeah.

And that's why I mean that's, I think, one of the reasons why it took 50 plus years to build up the network of credit card merchants and consumers in America, whether it's Visa or MasterCard or American Express and the like because yeah, there's some good things here, but they're like there's some really bad things to this system too.

So then you mentioned debit.

Once the rails started getting laid for credit card transactions and the early ones, i think, were super kludgy.

I think merchants like had to call up the issuing banks of the cards.

Like there wasn't the automatic you know swipe and automatic phone system that checked everything right.

But as that started to get built up, then the debit rails got laid and banks said, oh okay, we can create check cards that they were called initially.

They came out in 1969, I think, in America and use some of these same technology rails, but have it be a debit system.

So that's a little better, but I think it's still is pretty slow.

I think it's basically auto.

I could be wrong on this, but I think it's basically just an automated version of, Or a card version of, ACH in the check system.

Okay, so all of this works fine for a long time.

But then the internet really starts taking off as we chronicle so much on this show.

And once the internet starts taking off, people start spending and having financial relationships and financial transactions in so many more places than they used to.

Mm-hmm.

It's just there's a lot more volume in the system than there used to be.

And famously, you know, Paul Graham even put out a request for startups.

Was this in 2008, maybe 2007, 2008 about, hey, accepting payments online is really hard.

Somebody should do that.

And, of course, two brothers from MIT.

The Stripe kids found that and they started Stripe and made it easy for businesses to take payments online.

Which, of course, is our modern infrastructure.

Stripe and companies like Stripe.

As a merchant, you just have a token, which is the notion of that customer's card where, if you pass that token to Stripe, Stripe says yeah, I've got their card stored.

So you never have to take on that risk of getting hacked or knowing the person's number, and the consumers are better off, because only Stripe actually knows your credit card number.

But that certainly was not the case in the first 15 years of the internet.

Totally.

So what happens is like always you've got these entrepreneurial attempts to make the system better and build on top of it.

Stripe being a great example, Square being another great example, Venmo being another one.

As the internet is proliferating, people are building out essentially new layers of infrastructure on top of this old, traditional financial and banking system.

At the same time you also had over the first 20 years or so of the internet.

A couple attempts to start to design some new protocols from scratch for digital money.

So these were companies and projects that you've probably never heard of, like DigiCash, which was a company I think started in 1996.

EGold was one of them.

Bitgold was one, which got pretty close.

And then actually in China, this is really interesting.

Tencent had QQ coins, which were part of the QQ network, the pre-WeChat part of Tencent.

And they became so valuable that people started transacting lots of things in QQ coins in China.

The CCP didn't really like that.

So they started regulating that pretty heavily because it was becoming too popular.

But of course the other big attempt to solve all this financial and money problem on the internet, of course, was PayPal.

And PayPal was really interesting.

And they kind of almost did it.

So, with the whole vision of PayPal, Elon's vision, Peter Thiel's vision, going back to the beginning, was to create internet native digital money.

And they did and they found the killer use case on eBay with Beanie Babies and other things happening.

But the problem with PayPal was they did it as a centralized system.

And of course, it's still denominated in US dollars.

Sure, I can pay through it.

And that really is the problem you're describing here that you're trying to solve.

How do you take payments on the internet?

But certainly when we compare to something like Bitcoin.

That is a completely different complete monetary system.

What PayPal was doing was a much thinner slice.

Yeah, much thinner slice.

Well, and also they ran into the problem of they were like a bank taking care of all of these transactions happening.

There was so much fraud like one of the biggest challenges for paypal was managing the fraud, and actually palantir, as lots of listeners may know, grew out of the fraud prevention technologies that they developed at paypal.

But it was up to them.

You know, whenever there were the equivalent of chargebacks or accusations of fraud, they had to mediate all of these transactions and decide what was what and reverse some of them and make sure everything was operating OK.

So, like it was, the rails were better for the Internet, but they still had this problem, problem that it wasn't very efficient because it's built on all the previous layers of this monetary system where fraud can exist.

Because our current means of securing accounts and transmitting money and you know, even the money itself, like it's not, it doesn't lend itself to security, it lends itself to vulnerability.

And then we've built up all these ways that it can be secured which, of course, are expensive to maintain.

Yep, totally.

And it was.

It was ultimately, it was just a digital version of the same model of the traditional finance and banking system.

OK, so then we get to 2008.

And for so many reasons that we talk about on so many episodes on this show, that was the seminal year.

And and really, in this case, I think it's two things.

It is, of course, the financial crisis.

It's Lehman going bankrupt and massive bankruptcy.

Yeah, absolutely ahead of.

It's so funny when you say payments on the internet.

It's like two completely different archaic stacks that now need to interact.

Like for all the credit we give the modernity of the internet, it's an insane system.

The protocols that are used to underpin the internet are.

They've evolved a lot over the years, and especially the fact that a couple of years ago we sort of wholesale switched to HTTPS from HTTP.

But you've got UDP and you've got SMTP to send email and you've got all these protocols that people have sort of stitched together.

And then, of course, you have a browser that sits on top of it all, and there's the World Wide Web that sits on top of HTTP.

So there's all these different kind of kludgy, kind of archaic technologies, now including JavaScript, which for some reason runs.

Everything that by some miracle duct taped together correctly created the internet, which is amazing.

And that's this entire separate other stack on top of the problematic monetary stack that we've already talked about.

So, like when you say payments on the internet, it's like i hear, like complex ball of yarn with a different complex ball of yarn that need to somehow fit together, and obviously we're making it work.

But boy is it nasty on either side, Totally.

And this is why something like Stripe, you know, people didn't think it could be done.

Like it was so hard to make all of this work.

Okay.

So 2008?

On August 18th 2008, a domain name is registered under the name Satoshi Nakamoto for bitcoinorg.

Okay.

Nobody really notices this happening.

Okay.

Then on September 15th, 2008, of course, Lehman Brothers goes bankrupt.

Remember that day?

Well, I will never forget that day working on Wall Street at the time.

And then on October 31st on Halloween so like six weeks after Lehman going bankrupt, a account with the name of Satoshi Nakamoto goes publishes a paper on the cryptography mailing list metsdaoorg describing a new digital cryptocurrency titled Bitcoin, a peer-to-peer electronic cash system.

And this is why I started where I did with History and Facts.

I think so many people, when they start explaining Bitcoin or trying to understand Bitcoin, they immediately talk about like well, this is an alternative currency and the federal reserve system and fractional reserve system is broken and inflation and this is better.

And yeah, that may be true.

We'll get into all of that.

But the actual original intent of this was to design a native payment and currency system for the Internet that didn't have all these problems.

Yeah, it's so interesting, like literally a couple hours before we record.

To put the icing on the cake of my research, I reread the Satoshi paper.

And it is amazing how, in the several introductory paragraphs which, by the way, the whole paper is crazy succinct nine pages, including its references and sources cited.

It's mostly talking about.

Hey, because the system for transmitting money is relatively insecure and requires central authorities to verify everything, either the Federal Reserve Bank or banks in general, or whatever it is.

We basically have this big tax on the system that you could have fraud, that you could need to reverse charges because they, you know, were made by someone who didn't actually have the money or they weren't who they said they were.

So the whole system carries this big tax.

And what I'm proposing here is a way to pay for things that basically, is a system that exists completely outside that system and is fundamentally better because it doesn't require those taxes.

Everything is verifiable and authentic.

So here's how the Completely non-reversible transactions are not really possible.

Think about chargebacks on credit cards all the time.

Like this is a huge issue that so many internet companies deal with.

Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes.

The cost of mediation increases transaction costs with the possibility of reversal.

The need for trust spreads.

Merchants must be wary of their customers hassling them for more information than they would otherwise need.

And a certain percentage of fraud is accepted as unavoidable.

This is what they're talking about.

Okay.

So hopefully you can see why an alternative system would be really interesting and important.

Yeah.

And it's so interesting that it's not this paper isn't about.

We need a different asset class that is immune from inflation or at least more resilient to inflation.

Or we need decentralization because governments putting too much faith in governments like none of that is actually in the paper.

All of that is sort of decentralized derivative byproduct and lore that has sort of developed around this initial problem of a peer to peer, no centralized third party, trustless system for transactions at low cost.

Yep.

And to be clear, whoever Satoshi Nakamoto was, is people think, probably isn't just one person, it was a group of people.

And the early people who start getting involved in Bitcoin, They believe everything you just said.

They tend to be pretty libertarian-minded folks.

But that wasn't the purpose of why they came together.

So I mentioned DigiCash, eGold, BitGold, previous kind of attempts at this.

Kind of half of the problem was solved.

You're compromised.

That had been fixed through email and other technologies on the Internet.

Encryption was a thing like username, password combinations.

The idea that you could have a public address, like an email address, that anyone can transact with, but you retain a private key effectively to access that.

That was already baked.

That was trivial by the time Nakamoto came along and published the Bitcoin white paper.

Totally, totally.

And this notion of public key encryption that you're talking about David, absolutely one of the greatest inventions in human history.

I mean, if you think about ciphers from pre-World War I era, in war you would have the same key to encrypt and decrypt.

And that notion is great if you can securely transmit that key to another person and trust that they're going to keep it secret.

But the brilliant idea behind.

I have a key that only I can use to send email as me, but there's a way that you can send email to me or, applied in another context, you can send me money or you can encrypt a message that only my private key can decrypt.

So You can sort of publish it in the whole world and say here's an encrypted message that anyone could read if they had the private key.

It means that only the person who the message is really intended for, even if the message is intercepted, is the person who can read it.

Yep.

So, okay, so what's the problem?

Well, the problem is, think back to email.

If I send you an email, you can copy that email.

You can forward that email.

I can copy other people on that email.

Great for email, bad for money, right?

I don't want you to be able to send me 100 but then also copy someone else on that 100 and essentially double spend the money or triple spend or a thousand times spend.

And this was the problem that nobody had a good way to solve.

And this is what was just so revolutionary about Bitcoin and Nakamoto's solution is Yeah.

I mean zooming out for a second.

The big idea in software think back Windows 95 was creating infinite replication, creating abundance.

Microsoft prints a copy of Windows 95 for basically zero marginal costs.

They put it in the box.

There's of course distribution costs, but cloning the bits over and over and over again made this incredible business model.

Then the internet rolls around and then suddenly you've got zero cost distribution, which compounds the abundance from the zero cost replication of software.

So now you have it doesn't cost you anything to make a copy and it doesn't cost you anything to deliver it.

So think about that.

Like everything that we sort of know to be true up to this point is that if something's digital, it can basically be copied, and everywhere, quickly.

And the big idea, which is completely genius and previously thought to be impossible before Bitcoin is creating scarcity with software on the internet.

Absent the fact that now we know Bitcoin is a thing.

It would have sounded ludicrous if not then elegantly laid out in this nine-page paper of here's how we're going to do it.

Yep.

Okay.

So how do you do that?

Well, the solution that Satoshi proposes is a quote peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.

Well, why is chronological order important?

Go back to the.

I'm emailing you 100 and I'm copying somebody else on that transaction.

Example, example.

Whoever gets the $100 first, then it's spent.

The next transaction is void.

Like if I were trying to give somebody a paper 100 bill well, the first person who gets it, they've got it.

Yep.

And, of course, the way that this actually works we talked about public key encryption is when I'm sending it to you, I sign it with my private key.

Like I take that Bitcoin, which is a hash that has you know all the other signatures that came before it, sort of in there.

And I know that's not technically exactly right, but that's the reasonable way to think about it.

And I sign it with my private key.

I send it.

And so anybody else out there, if they wanted to sign something from my wallet or that I sort of owned, they couldn't.

They only have my public key.

I'm the only one who can sign it and send it to someone else.

Now, of course, that someone else can verify that I sent it to them because they have my public key.

So they can quickly do some work and sort of check the work and say... yep, that did come from you.

But they don't need to know my private key in order to do that check.

Yep.

Okay.

So if this system were to exist, all these transactions, thousands of them, millions of them, billions of them, would be going out into the network.

How do you keep track of which ones are the valid, correct, unique, scarce ones.

The way that Satoshi proposes you do this is you have a distributed system of the ledger so everybody can see the entire chain of transactions of every transaction that has ever happened within the system.

Yeah David, I think that's a really interesting concept and a little counterintuitive, where he's basically saying well, in a third party system, like where you kind of have a mint or you know the Federal Reserve, like you send that information to them and they keep track of it.

Like that's the only way to make sure that the money is not getting double spent.

And he's saying well, what if we've put that on his head?

He they she, whoever it is?

And saying well, what if everybody has a copy of the ledger and everybody just has the complete transaction history of every single Bitcoin right there on their computer?

That's my proposed solution.

Yep.

And so if you're doing that, then he proposes that people who would choose to, who are part of the network, they could grab these transactions that are being broadcast out and they could generate computational proof of which ones came first, which ones were the right ones.

If somebody is trying to send a Bitcoin multiple times, which ones of those happened first and are the correct transactions that should be added to this ledger?

He's basically saying there's a whole set of people out there who have decided they want to host on their computer the entire transaction history and they're going to do some work to verify.

They're going to go back through and they're going to say I'm going to do some math, to do some checks and basically say hey, are all these transactions valid?

And they're going to run their computers to kind of do that and make sure, basically verify the integrity of all these transactions here.

And you know, if they verify and say yep, this is good, they're going to propagate it out to more computers and more people who are on the network, so that essentially there's like one canonical version around there that everybody's sort of copying off of, that has a bunch of thumbs up on it saying yep, I've checked this.

It's good.

Yep. okay, so how do you design this system so it's not just total chaos of everyone doing this?

You make it computationally actually pretty hard to prove that you have the correct order of transactions.

Okay, cool.

That means that once one of these super users, one of these nodes, broadcasts out a set of transactions, everybody can be pretty reasonably assured that it's correct.

Two though, because you chain these transactions together into one ledger that goes all the way back to the beginning.

If you make it hard to compute each block, you make it impossible for anybody else to then change that ledger, because the block is cryptographically changed to the previous block.

That's hard to do.

It takes and the system adapts so that it always takes, on average, about 10 minutes for everybody all the miners out there that are working on these transactions which is more computing power than you can imagine right now.

It still takes 10 minutes to create one of these blocks.

Now to go back and change and fake some of the previous transactions, you would have to recompute the entire chain all the way back to the beginning.

It becomes an exponential problem.

If you could do this, not only would you have to broadcast it out to a material part of the network and not just have it on your own machine, but tell your friends and have them tell their friends, and all that.

It's exponentially difficult to take the hard thing to do in the, But then it's also exponentially hard to go and rewrite every block that then is stacked on top of that one.

Right.

So when you set up the system, say for the first week or month or, depending on how many people are using it, even a year or two, It's not so hard.

If somebody wanted to come in with a lot more computing power than other miners on the system, they could recreate all the transaction hashes back to the beginning, insert their own fake transactions, give themselves 100000 Bitcoin and then pass it off as the new one.

If you had an M1 MacBook Pro and the only other... You could go back to 2012.

Right.

And there was only a handful of other crappy laptops doing this in the early days, then sure your compute power would outmuscle a lot of these early ones.

But that's not going to happen as soon as it reaches sufficient scale.

Well, this is what's so cool.

It becomes a network effect economy.

Because the more transactions that are happening and the more blocks that get created and the more computing power that's working on that block, the harder and harder and harder it becomes to forge it, till you get to a point where we are now where you would need the total amount of computing power that has gone into Bitcoin since the beginning, plus some more to break it.

That's just not possible.

There's no way at this point.

Because it's been operating for so long, with so many nodes on the network, so many transactions happening, so many miners mining, it's impossible.

Now you can guarantee this is what Satoshi saw.

If you could get to this kind of network with this density and scale and operating history, it would be impossible to crack it.

And then all of the fraud, all of the double counting, all of the costs on the system that we just talked about with the traditional financial system wouldn't apply anymore.

Yeah, it's interesting.

So what we're kind of talking about here is laying the groundwork for basically, a system of accounts where you can be super sure that if you're sent money, that it's legit, that there's not a risk that they didn't actually have that money and you're And you know it's legit because you've got all this, everything we just described going into saying that hey, if I receive this Bitcoin to my address, it's not going to get undone.

Or it's at least extremely unlikely that it's going to get undone because of all this work that's going into it.

We did, we jumped to use the word miner.

And I want to explain how that fits into the context of what we were talking about about five minutes ago.

So we were saying that there's these people who have a whole copy of the blockchain, of basically the entire transaction ledger leading up to now, sitting on their computer and they're doing work.

They're going through and running cryptographic algorithms to basically ensure the authenticity of all those transactions and check and make sure that yep, these are all correct.

Well, of course they need to be compensated for that, because they're taking electricity.

They're, you know, running their machines.

The fans are on real high.

In all likelihood their GPUs and now even more specialized mining hardware that exists in a data center somewhere close to a river, so they can have easy access to cheap renewable energy.

Yeah, maybe back in 2009, researchers like Nakamoto and the people that he shared this with originally would have done this out of the goodness of their hearts, because it's cool, but that's not going to scale.

Yeah.

So what was initially sort of a byproduct and is now sort of the incentive of mining one of these blocks is the first coin on the block gets given to you as a thank you for doing the work to verify the integrity here.

And without getting too far into the specifics of how that actually works, what it basically means is you're getting paid for your labor, or you're getting paid at least for the energy that you're putting into helping the system remain verifiable and authentic.

And it's not just the first coin, it's the first several coins on a block.

So it started with 50, yeah.

So, if you mind a block, which again happened every 10 minutes, you got 50 bitcoins in the beginning.

Now i think it's down to six and a quarter.

Six and a quarter yeah, because it halves every time which, of course, we will talk about how bitcoin is not an inflationary currency, but it has a finite number.

Slightly under 21 million will ever get mined um, and it uses sort of a uh, a halving function, so that um, every four years, i think, the reward gets cut in half.

So there is only a certain amount of bitcoin that will ever be mined.

So you can count on the sort of system not getting watered down by injecting more and more bitcoin into it above this very predictable regular declining schedule that we have sort of observed.

What you were saying Ben, is so important.

We just described the super cool system.

It'd be awesome.

It'd make money on the internet, work much better.

It's going to require so much compute power.

Why would anybody do that?

Why would these coins have any value?

They're not dollars.

They're not backed by a government.

The reason is what you were just saying.

The coins get created by doing the work to make the system what it is, which is really, really good.

Yeah.

So the value is in the work itself.

It's a recursive system.

Right.

What you have from the work being done is a system of integrity.

And the network effect may be small to start, but you can count on the fact that you can be very certain that all of those transactions have been combed through.

And while technically there's no chart of accounts, you sort of figure out who has what in every account by running through the whole transaction history and figuring out where all the chips fall down, when you sort of run through line by line, by line by line.

But effectively what you have is a big chart of accounts where you know for damn sure that those are right.

Those accounts actually contain those Bitcoin.

So if you own a Bitcoin and the first people who own that Bitcoin, or when it's created, are the people who mined it, and then it gets transacted and you own some, I own some.

You know people who buy and invest.

What you actually own is you own a piece of the computing power that has gone into making this system robust and secure and viable and good for everyone.

Yep.

Well, before we move on the story here, I think there's a there's a couple of little rabbit holes I want to go down.

So we've talked about this like cryptographic work a few times.

I want to talk a little bit about the idea of one way functions in computer science.

There are certain types of math that are very easy to do in one direction but very difficult to undo in the other direction.

And a classic example of this is the product of two prime numbers.

So if you multiply prime number A by prime number B, it's fairly easy to do that math.

You know, you could imagine like literally doing it on paper.

You could imagine writing a computer program to do it.

You know bringing those numbers into the registers and assembly code.

You know multiplying them together.

But if you're given the product of those two numbers, especially when all the numbers you were dealing with are very large, you can imagine that it gets extremely difficult and would be very inefficient to try and figure out what the initial two prime numbers were that created that product.

So the magic that kind of makes this one-way function work is the fact that it's easy to multiply two prime numbers together, but very difficult to factor large primes.

And of course it's gotten much more complex since this initial insight.

But I do want to sort of pause on that for a.

When they tell you they have the answer, this product, and they provide you one of the factors or one of those initial prime numbers, you can very quickly do that math and say yep, checks out.

But it's super hard for you to stumble onto the exact two initial numbers without knowing any other piece of information.

So this system, totally ingenious, I want to, David Rosenthal style here, rewind back to 1874.

William Stanley Jevons wrote in The Principles of Science.

Keep in mind.

This is a little under 100 years before the personal computer was created.

So he sort of came on to the very first idea of the one-way function.

And obviously now a computer can very quickly through brute force sort of figure out what the two you know, guess and check, guess and check, guess and check, figure out what the two factors of that number are.

But you can imagine if that number were extremely large, then it would take modern computers a very long time.

Or frankly, if you make them large enough.

It makes it impossible to our knowledge for computers today to undo that problem.

It requires just way, way, way too much work.

And if you make them even bigger than that, then you can say, assuming computers get better at a certain rate, like this problem is never undoable.

There's a scary thing that exists here which is, at some point, like we have not proven for sure that one way functions exist.

We've tried to undo them a bunch of different ways.

And mathematicians everywhere have tried to sort of prove this problem.

It's this kind of scary thing where, like we rely on this for public, private key encryption, encryption of all kinds, hashing everything in Bitcoin is based on it.

Anything with any password that you log into anywhere is based on this.

Your email is based on it.

And we're like pretty sure that you can't do that in the other direction in a computationally efficient way.

But like we're not provably sure.

Yeah, right.

When we were saying a minute ago that you would have to put all the computing power that's gone into Bitcoin back into Bitcoin, back into trying to forge it.

That would not be the case if you had a way to break this encryption.

If you stumbled onto yeah, like a different, if you basically invented a novel algorithm that mathematically could undo that work just as efficiently as it was done, instead of the horribly inefficient way that we know how to do it now, which is basically brute force.

But the point is, yeah, that would break Bitcoin.

That would also break all security.

You could log into any account anywhere.

So it would break the traditional system, too.

Absolutely.

One other little aside, which I think is a fun place to put it here, is this notion of public key encryption, which is advancing further on this idea of using one-way functions, which is the thing we were talking about earlier, where...

I can broadcast my public key so anybody can send something to me, but only I have the private key.

So I am the only person who can either decrypt the message or send it to someone else, or however you decide to sort of leverage that.

This concept is actually born out of that 1874 discovery of prime factorization.

Pretty amazingly, two different groups of people took this idea and turned it into this public-private key discovery concept.

Right around the same time 1973, in Britain, but they kept it a secret because they wanted to use it for defense, because it's freaking brilliant that you have, you know, the notion of transmitting messages in a more secure way on the battlefield.

The very same idea was discovered within the same time and ultimately was publicly announced in 1977, now known as RSA encryption.

And it's crazy to me that it's kind of like physics or calculus, where private, public key encryption was sort of dual, discovered in the same decade by different people who had no notion of each other.

And in fact, the first set of people was desperately trying to keep it a national security secret.

It's like the world was just ready for the discovery.

Technology and modern math had advanced to the point where, based on the same foundation, two different groups could independently make the same invention simultaneously, which is really interesting.

Totally.

Okay, so now we've got our math lessons done.

We know how encryption works.

We know private and public key.

We know why that's better than the traditional financial system.

Now we also know, with blockchain, why and how mining creates this scarcity and makes sure that transactions that are the legitimate transactions are the only ones that can happen.

What's cool here is this basically turns into a regular acquired episode now.

Because remember how I was saying that as the system of mining grows, the more mining power that goes in and the more transactions that happen.

It becomes a network economy.

And then the overall value grows.

It's just like Facebook.

So you know the think back to the social network, which is going to come up in a second.

You know that line of like if you created Facebook, you'd have created Facebook.

Anybody can create Facebook.

Anybody can create Twitter.

Look at parlor, right?

Like the question isn't creating it.

It's getting critical massive usage.

Yeah.

And then the value, it's valued based on network economies.

We know how to value them.

Metcalfe's law, which is the value of the economy, is the square of the participating nodes within it.

So now it becomes a race, because anybody could take the white paper and start their own coins, their own cryptocurrencies, their own blockchains.

JP Morgan could just go take this and implement it for all of their businesses.

In fact, many people tried, right?

Like all these altcoins were forks of the Bitcoin source code to my favorite little tweak on this and Dogecoin and thousands and thousands of people have tried to create alternate cryptocurrencies with varying levels of success.

Yep, totally.

And some of them are quite valuable.

But having that early lead and then growing the network and getting use cases for it, just like Facebook on college campuses, that's what starts the snowball rolling.

And then the bigger it gets, the less and less likely it is that anybody's going to catch up.

So in January 2009, Satoshi boots up the system.

Essentially, he codes it up.

He creates version 0.1.

Which is amazing, by the way.

You've got not only this researchy-looking white paper that was published, which several other people published competing ideas up to this point.

I think Hashcash was one of them that weren't maybe quite as elegant but had some of the same component parts.

Satoshi Nakamoto, pseudonymous or not, not only publishes the paper, but then, of course, writes the first actual working implementation in code.

Hashcash is interesting.

This is an aside, but it's probably the thing that was closest to Bitcoin before Bitcoin.

But it wasn't designed as money.

It was designed as an anti-spam system for email.

Yes.

This is freaking brilliant.

So this proof of work concept that we talked about earlier, where it's extremely difficult to do the math in one direction, but very easy to check that the math was done, was basically applied as a spam filter.

You said, hey, you kind of have to do this much computing work in order to be able to email me.

I can quickly check if you did that work, but it can be real expensive if you want to DDoS my email and spam the crap out of me, because I'll just kind of reject it if the math is wrong on the check.

Okay, so beginning of January 2009, Satoshi boots up the system, literally bootstraps it.

He mines the first block, the Genesis block.

He gets his reward.

He, they, she gets their reward of 50 bitcoins.

And then he starts recruiting an open source community of researchers to work on the product, work on the code, build the system, create mining nodes.

This all starts happening a couple days later.

Nakamoto sends the first Bitcoin transaction to Hal Finney, who was a researcher, who he had recruited a crypto researcher into working on the project.

And is this on that Cypher Funks email list?

Yeah.

Yes.

So Hal was a cypherpunk.

Tragically, I think he died of Lou Gehrig's disease a few years ago.

I think it was all on the same email list that he sent the white paper out to.

So he sends the first actual transaction out there, gets mined on Satoshi's mining rig.

And for the next year.

Not sure if that's 100% right.

He offers up an idea to see if these transactions can actually have value in the real world.

He says he will transfer 10000 bitcoins in exchange for anybody out there on the mailing list who wants to buy him a pizza.

I love this.

So programmery.

So great.

So somebody in England, of all places all the way across the Atlantic Ocean, sees this and is like I'll do that.

I'll take 10,000 Bitcoins.

So this person couldn't get their name.

They call up the local Papa John's near laszlo.

They ordered two pizzas using a credit card, have them sent and delivered to laszlo and laszlo then sends 10 000 bitcoins over in exchange for this, and this is the first real world transaction.

I think this is with bitcoin.

Approximately values bitcoin at 025 cents per bitcoin.

I think that's if you assume like 20 bucks for the pizza.

25.

Yeah.

It's also funny to think about like, sure.

Yeah.

I'll order you a pizza that saves me 20 blocks that I don't have to mine.

Like if you're like, yeah, yeah, this is valuable.

It's taking me forever to mine these blocks.

Great.

Yeah.

Amazing.

I just also like Papa John's.

That's the first shack is on their board of directors.

He should be proud.

There you go.

Shortly after, that is when nakamoto disappears off the internet.

Uh stops contributing to the projects.

He transfers control of the open source repositories to some of the other developers on the project.

Uh, he basically washes his hands and says i'm done, except At this point he has somewhere between 600000 and a million Bitcoins that he's mined as the first miner on the system.

Like he has a million of the you know whatever four or five million that existed at that point, 21 million that will exist, total.

Like this is a huge amount of the Bitcoin in the world.

Yeah, which nobody thinks twice about at the moment.

They're like, oh, okay, I guess he moved on.

He actually communicates with.

Somebody asks him what's going on and he says in an email message I think I've moved on to other projects.

But there was never any personally identifiable information out there about this guy or group or girl or people.

And what Satoshi did is quite remarkable in being untraceable.

Most of the time, these people slip up in some capacity.

Their personal account is the first one to follow their account, or they...

If you know, their emails are ever leaked like they made a communication with, or their backup email is their personal email, or they did a two factor auth from their phone number, or there's all kinds of ways that, like you, sort of discover later.

Yep.

Turns out this really was this person.

Oh, the first time they registered the domain name, they did it with their email address.

Like Satoshi did none of these things.

And to this day, it could be one of 10 people who people think it is, or it could be none of those people.

We have no idea.

Yeah.

Well, and I think this is also one of the reasons why people really believe it was a group of people.

Because then if it's a group of people, then there's obviously no way that they would slip up and expose personal information.

The paper is also written we.

Whether that's the royal we, I don't know, but they keep saying.

So he disappears.

Interest keeps growing though, and some transactions happen mostly between the people that are mining the currency.

In early 2010, a forum user on BitcoinTalkorg named Smoke Too Much, that's Smoke.

T-O-O-M-U-C-H offers to auction 10000 Bitcoins for 50.

So it's like $25 for the Papa John's.

He wants sort of twice the amount of money, wants a 2x return.

Nobody takes him up on it, though.

So in April, he declares the auction over.

He keeps the 10,000 Bitcoins, I guess.

Nobody gets them.

Probably pretty good for him.

Interest does keep growing, though.

People do start tracking roughly the exchange rate between the US dollar and Bitcoin.

It rises up by the whatever metrics people are sort of using, which is already a 120 x return on the papa john's deal.

Uh no, even more than that, because the papa john's was a fraction of a cent, right.

And and this is what now?

30 cents, 30 cents, Yeah.

So 120X, it's kind of crazy to think about.

When I said earlier, this was a 3000X.

It's crazy to think about what a gigantic multiple of that was so early.

It's kind of like if you buy a penny stock that actually makes it into dollar territory, you had this unbelievable return.

It's that.

Yep.

It's that.

And then it keeps... going.

So by the end of 2011, there's a pretty robust market for exchanging dollars into Bitcoin, which we're going to talk about in one sec.

And Bitcoins are going for $5.27 per Bitcoin. which is crazy.

Who out there is going to be using it?

Who wants to be exchanging dollars in Bitcoin all the time?

That's a $52,000 pizza at that point.

Yeah, that's a lot of dough.

So it turns out that in February of this year, in 2011, a little service calling itself the Silk Road launched.

And this was the first killer app for Bitcoin.

Yeah, it's worth pointing out here that if one of the primary value propositions of your product is it's like money, but you don't have to put your name on the account, you're going to attract some people who are using it, who don't want to put their name on an account and otherwise would have to in any other system.

Yeah.

So this is just amazing.

The story.

And this is actually when I first started hearing about Bitcoin was I started reading the headlines about, about the Silk Road and what was going on.

I was like, whoa, that's like crazy.

But this Bitcoin thing is kind of interesting underneath it.

So in February 2011, somebody calling themselves the Dread Pirate Roberts, named after the character in the Princess Bride movie which is just amazing launches an online black market and the first modern darknet market on Tor, which is encrypted internet that you need an encrypted browser to browse.

And this thing is basically eBay for illegal stuff.

Well, it's eBay for anything.

The biggest items that are transacted on it are not Beanie Babies.

It's drugs.

Right.

I mean you're using a browser where the web history is not saved, where it bounces through a bunch of proxy servers.

All the traffic is encrypted.

And now finally, you have a way that you can pay for stuff that doesn't ever get linked back to a financial institution that is associated with your name.

Right.

It couldn't be the more perfect cocktail for selling drugs on the internet.

Totally.

And what's kind of amazing is it's exactly like eBay.

So the way this worked was people would pay for the goods, the drugs that they were buying, with Bitcoin, just like PayPal.

And then the sellers would put the drugs in the mail, like the US post office, because you can't search mail.

Uh, it's illegal, it would, it's mail fraud and uh, and so it's literally just like ebay.

This is exactly how this is working.

It's ebay for drugs.

Uh, i guess i always assumed they had to.

I just never really thought about like how would you get it mailed to you Or how would you get the goods?

Most of these people aren't in the same city.

It's happening all over the world.

And yeah, so it was actually kind of crazy.

So this character Dread Pirate Roberts.

He wrote that he wanted Silk Road quote grow into a force to be reckoned with that can challenge the powers that be and at last give people the option to choose freedom over tyranny.

It's kind of amazing.

There was a book club section on the website and the book club still exists.

It's like part of a message board now.

No way.

So the business model that they had, I think eventually they did shift to an eBay style business model, like a traditional marketplace, taking a cut of every transaction.

Hmm.

But at the beginning, I think they didn't want to get involved in the transactions themselves.

Oh yeah, that'll legally protect you as long as you're not taking a vid.

Yeah, for sure.

It's all good.

We're just a platform.

We don't know what happens on the platform.

We're just a platform.

So the first business model was you actually had to pay to create a seller account.

So you paid in Bitcoin to create an account that you could then sell whatever it is you wanted to sell on Silk Road.

Amazing.

So this operates for two and a half years, starting in February 2011.

And by the way, there was a federal case opened almost immediately.

I know the feds were following for two years, putting the case together.

So observing everything that's going on.

Well, and there was think it was chuck schumer.

There's a great story that, like he was shown this on a computer, i was like totally flipped out, was like the government needs to, like we need the fbi to crack down.

Like of course, uh and uh.

So during this time, this amazing over 12 million transactions happen on silk road.

So if you're trying to bootstrap up the bitcoin network of the killer use case like this is like a looking at, you know, attractive freshmen of the opposite sex on campus for Facebook.

Like this is the way to get people.

Right.

It's like the pseudo nefarious catnip.

Here's an amazing use case that appeals to people's vices for this new medium that has been invented.

Yep.

Just like any new medium technology, there's no regulation yet.

So over a million transactions, almost 150000 unique buyers and almost 4000 unique sellers use the platform over this period of time.

They transact almost 10 million Bitcoins, which...

I don't know how many Bitcoins were in circulation at that time, but let's estimate, like I don't know, two to three, four million maybe.

So like several times over the total number of Bitcoins in circulation get transacted in the Silk Road.

Knowing what we now know about how the Bitcoin network works, like the Silk Road, can be largely credited with getting it over the hump to the level of transactions and the level of participants in the network where it's now a self-fulfilling prophecy of integrity and certainty of the network.

A hundred percent.

This is what's so ironic.

It's funny that i use the word integrity.

It's like the the acts of the potentially the least, depending on who, what moral authority you want to claim.

The acts of least integrity guaranteed the future integrity of this financial system.

Incredible, like you can't make this stuff up.

So FBI agents, this is amazing, conduct a sting raid.

They arrest a man named Ross Ulbricht at the Glen Park Library in San Francisco.

This is like half a mile from my house.

It's like right down the street.

I drive by it all the time.

Uh, it's this little like glenn park, is this beautiful little neighborhood in san francisco, total hidden gem nobody knows about.

It's very sleepy, very like neighborhood-y feel and the library is this like small little branch right next to the grocery store there.

So ross is hanging out working out of the library in glenn park and three fbi agents conduct a sting raid and Two of them pretend to be a couple, a romantic couple that are having an argument.

And they have a loud argument to distract him in the library so that he looks up away from his computer.

No way.

And then the other one comes and grabs the computer so that he can't lock it while they're arguing.

Of course, it was suspected and then proved to be true that Ross was Dredd Pirate Roberts.

Wow.

And when he was convicted, he tried to have someone killed, right?

Yeah, so that's the allegation.

He was never convicted of this, but part of the allegations that the government brought against him were that you know he's an interesting character.

He grew up in Austin, Texas, and this dude was an Eagle Scout in high school.

Yeah, so quite the reversal from Eagle Scout to...

I don't want to say drug lord, because you know he was just operating the platform, but he had quite the journey.

And so the accusation was that he had tried to pay.

I don't know if it was through Silk Road or through other dark net sites.

He tried to pay to have people killed who he thought were after him.

Nobody was actually killed.

None of this actually happened.

And he wasn't convicted.

But he was convicted of seven charges related to money laundering, computer hacking, conspiracy to traffic narcotics. etc etc and he's in jail for life right yeah he was sentenced by the federal court u.s federal court in manhattan to life in prison without the possibility of parole i think maybe like multiple life sentences kind of crazy there was actually there's talk of like trump wanted to pardon him or like god that's some crazy but like he's uh he's in jail he's in there Yeah.

I know he doesn't give interviews either.

He's very tight lipped.

Like a lot of journalists, obviously, have tried to sort of reach out and get his side of the story, but it's not happening.

Yeah.

So this is where like again, this is all just you know Silk Road itself was creating more interest in Bitcoin.

This crazy media story is creating more interest in Bitcoin.

The FBI, as part of this raid, remember, they got his computer.

They seized all of his Bitcoins.

So the US government now has 144000 Bitcoins that they've seized from Ross and from the Silk Road, which at the time wasn't worth that much money.

No, but now it's 4.3 billion.

It's a lot of money.

So...

The next year I had forgotten about this till doing the research.

This is amazing.

They hold an auction, an online auction like this, you know, U.S.

Marshals, they do a raid.

They hold.

You know they get drug dealers like you know Lamborghinis and stuff and they auction them off.

They do the same thing with the Bitcoin online.

So they auction about 30,000 of the 144,000 Bitcoin online. online and tim draper the venture capitalist you know founder of doj he buys the bitcoin tie guy bitcoin tie guy he buys the bitcoin and it's all like a publicity stunt but he paid 17 million for 30 000 bitcoin wow i hope he held on to those because he would be doing Probably better than his entire venture career on that at this point.

Amazing.

So fun little coda on that.

Actually in November of 2020, so like two months ago, part of I don't think it was part of the 144000 Bitcoin, but there was another about 70000 Bitcoin that were known to have been associated with Silk Road like part of Silk Road's Bitcoin that people didn't know where they were.

They transacted on the blockchain.

And so people saw this transaction happen.

They're like, whoa, what happened?

And it was about a billion dollars at the prices a couple of months ago, these 70,000 Bitcoin.

And it turns out what the transaction was that the FBI they haven't identified who or the circumstances, but the FBI had found they call it individual X in when they came forward and explained what happened.

This person had hacked Ross and the Silk Road before all this went down and stolen these 70000 bitcoins from Ross.

And then the FBI tracked him down.

And then the transfer was they were transferring those bitcoins to federal custody.

Oh, interesting.

So isn't that amazing?

So the person committed a different crime hacking Ross and the FBI was busting the crime of hacking.

Yes.

The crime against the criminal.

Yeah.

It's worth contextualizing a little bit sort of what's happening here when someone gets hacked or when Bitcoin get lost, because those are sort of two different things.

There's the situation.

It's not the fault of Bitcoin when that happens.

Sort of.

It's the fault of bitcoin for having a wildly obscure system that makes this whole thing tick.

But you know, is it.

Is it the pilot's fault when it's hard to find a complicated airplane?

That's like the.

That's the question here.

So of course, you can sort of hack and into ross's computer you can get his private key and then you can use his private key to authorize um sending that 2020 billion dollars, uh worth of bitcoin over to your account.

But That is a very different thing than what has happened for something like 20 of the entire Bitcoin supply which, when you look through the ledger, through the entire blockchain, has not transacted in a really long time, presumed to be lost.

And what lost means is.

The owner of the person who it was most recently transferred to has lost access to the private key, which is, of course, an unguessable, crazy long you know number letter combination that no one's ever going to be able to sort of guess.

It's not like a, you can click a forgot your password button for those people.

Like if you lose your private key, you're never going to be able to.

I suppose you sort of still own the Bitcoin, but who cares, because you can't ever do anything with it.

Right.

When you lose your email password or whatnot, There is a centralized provider, Gmail or whoever you're using.

They know your email password, so you can go through some hoops with them to get it.

But there is no centralized, as we talked about, Bitcoin provider.

So you better not lose your password.

Yeah, decentralization is a double-edged sword, for sure.

For sure.

There's one other number that's interesting to know here.

Satoshi.

It is currently believed that he ended up mining about one and a half million Bitcoin, which you know of the eventual 21 million so a huge amount are owned by whoever this Satoshi person or group of people are.

That's about $50 billion worth of Bitcoin.

So you've got 20% of Bitcoin are lost.

You've got what are maybe seven, eight percent that satoshi whoever satoshi is owns.

There's all these um bitcoin that are sort of like in areas that aren't transacting people holding the for the long term.

So there's only like even today, like three or four million bitcoin that are actually trading hands and and available in the supply demand equation to set the price.

I mean even just all of these Bitcoins associated with Silk Road that we're talking about.

That's like one to two percent of Bitcoins out there right there.

Right.

Just that we're this wasn't transactions on Silk Road.

This was like Silk Road's Bitcoins.

Right, right.

So the takeaway here is, like a lot of the big chunks of Bitcoin are owned by people who were using Bitcoin very early, when you know you could mine huge blocks and it didn't take that much compute to do so.

Yup.

Okay.

So Silk Road by 2013 is it's the end of it.

But while all this was going on from call it 2011 to 2013, as Silk Road was growing, all these people who are using it, they had to find, have a way to get Bitcoin.

They weren't just going to like, email the uh the list serves on Bitcoin talkorg and be like Hey, I want to buy some Bitcoin so I can buy some drugs.

Uh, there's gotta be a, an easier way for them to buy in to the system, so to speak.

Uh, And the way to do that is through exchanges.

And so this is how, just like any kind of currency exchange, like you said, this has been part of financial institutions forever.

You need somebody to stand up the store that's going to accept your dollars and hand you Bitcoin in exchange.

That store is going to be on the internet, but someone's got to operate it.

Exactly.

And so, for almost all of this period of time, there was really only one viable exchange on the Internet.

And it was an organization called Mount Gox.

That sounds right.

You know, like a mountain like sounds like Fort Knox, you know, like Mount Gox.

It's a trustworthy, secure organization that's going to store your Bitcoin and you're going to be able to exchange and buy it.

Right.

Well, had an interesting history of its own, shall we say.

So what is Mt.

Gox?

We go all the way back to 2006 when a developer named Jeb McCaleb...

Who was a big fan.

No, no, no, no.

In the US.

Okay.

Was a big fan, as am I, as are many people of the then going online, but physical card trading game, Magic the Gathering. he thought, you know, gosh, like these magic cards, they're super cool.

Lots of people love playing.

You can buy them on eBay and whatnot, but there should be like a, there should be just like, you know, later there would be goat and reverb and what they should be a vertical, like specific website on the internet for going and buying and selling magic cards.

Great.

I'm just going to code that up.

Why so?

This was created by jeb in 2006.

I don't know if he was not very good at distribution or whatnot.

Like clearly like, there's demand for this, like this, lots of people are trying to build this now for magic cards and pokemon cards and other cards um, but uh, for whatever reason, mount gox in its initial iteration didn't quite take off.

Uh, he had it up for about three months.

Nobody really used it.

He abandoned the site.

Um, Now we mentioned, his name is Jed McCaleb.

He's a programmer.

He's not just like any programmer.

This is nuts.

So do you know who he has been?

No, I don't.

So today he is the co-founder and CTO of Stellar, which is a really interesting crypto project organization out there.

I think it's actually a nonprofit doing cross-border remittances.

It's backed by Stripe.

Stripe is invested in it.

Prior to Stellar, but well after Mt.

Gox, He founded Ripple, and he was the founder and the CTO of Ripple.

Obviously, of course, another cryptocurrency with its own story behind it that we'll have to tell someday.

How after the incredible tragedy that we're about to get into of Mt.

Gox, was he credible enough to then lead two other cryptocurrency startups?

Really credible, big cryptocurrency startups.

Yeah.

Because he wasn't actually involved in Mt.

Gox through everything we're about to talk about.

So here's what happened.

He abandoned the magic thing, but he still had the website.

And then super early in crypto land, remember, he does all these crypto projects.

I don't know if he was on the original email list.

He hears about it.

And in July 2010 so like right after pizza day he gets involved and he realizes the need for this exchange, for people to come in and be able to buy Bitcoin.

And he says, oh, cool.

I can code that up.

I know how to do this.

And he's got the mountgox.com MTGOX website lying around.

He just says, oh, great.

Like, rather than I don't know why, rather than registering a new domain name, I'm going to use that.

Okay, in my head i had this like notion that people were like listing bitcoin in the same way that they should have been listing magic alongside magic.

He just repurposed the domain.

Oh it's like.

Oh, you could, you could buy a dual land or you could buy a like a satoshi.

Like amazing, amazing.

No, it was repurposed into just a Bitcoin exchange.

And so help me understand at this point in history if you're going to be doling out Bitcoin in exchange for dollars, you got to get your Bitcoin from somewhere.

So are they mining in order to create the supply that they're selling out to people who are depositing their dollars?

That's a good question.

I assume so, but I don't really know.

I bet that is... Jeb quickly realizes like...

This is going to be a major undertaking to do this, probably for that very reason, let alone operating the exchange, making sure all these transactions happen, taking custody, doing them well.

He, after just a few months, he runs it for about eight months himself.

And then in March of 2011, this is where...

Japan comes in, he sells it.

So he's just running it.

He decides, you know what?

I'm going to sell the whole thing.

He has an interested buyer, a guy named Mark Karpeles, who is a French programmer who was living in Japan at the time.

Super interesting character.

Okay.

Uh, and he makes an offer to buy Mount Gox from McCaleb, uh, which he does in March of 2011.

And the statement at the time, McCaleb makes a statement.

He says to really make Mount Gox what it has the potential to be, which is huge.

Like this is Coinbase.

And Square, Crypto and Robinhood, everything before that.

To really take it to what it has the potential to be would require more time than I have right now.

So I've decided to pass the torch to someone better able to take the site to the next level.

Unfortunately, that was not Mark.

So right after a couple months afterwards, in June 2011, after Mark takes over the site, the first security breach happens at Mt.

Gox.

Bitcoins are stolen and lost.

October 2011, they send 2,500 Bitcoins to the wrong addresses.

And again to the point of like if it ends up in the wrong place and you don't have the private keys, they're gone forever.

So Spectre, unfortunately, have things to come here with Mt.

Gox, 2500 bitcoins lost forever.

But there's still there's no other exchanges out there.

So, like anybody who wants to come in, anybody who wants to transact on Silk Road, just be involved in any way as part of the ecosystem, they got to go to Mt.

Gox.

And they handle for the next year and a half about 70 of all transactions in and out of Bitcoin that happen on the internet.

That's right.

It was so dominant.

I mean, that was like I think that even held me back from buying Bitcoin in those days, because I was hearing people talk about it.

I had friends texting me about it.

And I remember going to Mt.

Gox and being like, ah, I just don't know.

Yeah, this is like super shady.

Yeah.

Not to mention the Silk Road and all this out there, definitely held Bitcoin back from becoming mainstream for at least a year.

It's so funny in the whole crossing the chasm framework.

In some ways, I am an early adopter, but I'm not going to adopt something that is only being used, in my perception, for illicit drug use on the dark web.

Right.

Like it took until like Coinbase came around.

I think 2014 is when I started getting more interested in it.

But like it had to be at least that mainstream.

Yep.

Same here.

That was I started hearing about it with Silk Road and Mt.

Gox and everything going on.

But yeah, Coinbase was when I did my first transactions.

So by April of 2013, so a few months before Silk Road gets, the sting operation happens and Silk Road goes down Mt.

Gox finally starts its death spiral.

So they crash together at a certain point.

Because of the volume that is happening on the system in April, it's completely overwhelmed.

They suspend trading.

The price of Bitcoin crashes 50% just by virtue of, because they're doing 70% of the market.

All of a sudden, it'd be like if the New York Stock Exchange just went offline.

So the price crashes, a bunch of lawsuits start that they get hit with.

Then in June of 2013, Mt.

Gox stops the ability to withdraw in US dollars.

So you can still withdraw in other currencies.

But like, clearly things are not well here, not looking good.

And then in February of 2014, they suspend withdrawals altogether.

So you can't take money out of the system altogether at all, from mount gox and they file for bankruptcy and could you transfer to, like if you have your own like hardware wallet or something like if you knew an address of another bit, if you knew another bitcoin address, could you transfer.

I mean, i guess at various points along the way, but eventually you can't even do that and ultimately 750000 client Bitcoins, like Bitcoins that people were holding in Mt.

Gox, get lost, like permanently lost.

Private keys are lost.

They're gone.

I mean, almost a million.

And then another 100,000 that was owned by Mt.

Gox itself.

So that's 7% at the time of all the Bitcoins in circulation just blown out of the sky when Mt.

Gox goes under.

And just in client dollars, that's $22.5 billion of Bitcoin today.

They exist, but assuming that those people didn't download their private keys and they just trusted Mt.

Gox to say, you keep my private key.

Or maybe they couldn't even download the private keys.

But basically, if you don't have the private key, you're not sending it anywhere.

Yep, gone.

So fortunately, though, by the time this starts to happen and Mt.

Gox enters its sort of mid 2013 to beginning of 2014 death spiral.

Enough other people and other business minded people had gotten turned on to Bitcoin and interested in the system that they were like holy crap, we need better exchanges here.

Let's go build them.

So in many ways, now the most well-known one of these is, of course, Coinbase that we talked about.

So, in June of 2012, two co-founders, former Airbnb engineer Brian Armstrong and Goldman Sachs trader Fred Ursham, They're like we need to build an exchange, and not just an exchange to compete with Mt.

Gox.

We need to build a legitimate exchange that people are going to trust to use.

That we're going to work with regulators, that we're going to make sure that when people cash out a Bitcoin, they pay their taxes.

Do all these things to build this into a real functioning system.

And importantly, not just an exchange, it's an exchange and cloud wallet.

Exactly.

This is the innovation that...

It will make some people who are sort of true believers in Bitcoin, who are sort of part of the initial movement, it makes their skin crawl because it is ruining the decentralization.

But what they're basically doing with the cloud wallet is saying look, you're going to buy your Bitcoin from us.

You're not going to take your own custody of it because, like you, don't want to be in the business of having Bitcoin on your hard drive secured by your own public, private key pair that you manage.

Be responsible for backing up that drive somewhere, but making sure you don't make too many copies of your private key.

You don't want to be responsible for all that.

What you should do is just the same way you manage any other username and password.

You let us maintain your public-private key pair.

Effectively.

It lives in our cloud, on our servers, and you log in with a username and password and you do 2FA and all the stuff that you trust.

But we have custody of your money.

It's kind of like a bank.

Or maybe more like a bank or like a brokerage firm like Charles Schwab.

Like you don't hold your stock certificates that you have in Schwab or Vanguard or whatever.

They do.

But then you don't have to deal with the complexity.

It's a little compromise, but it makes it way more accessible to way more people.

Obviously, if you're a hedge fund, you're not going to use Schwab.

You're going to do all that yourself.

If you're a big player in crypto, whether you're an institution or otherwise, you're going to have your own wallets.

You're going to do it yourself.

You're going to print out your private keys.

You're going to cut them up and store pieces of those keys in safe deposit boxes all over the world.

That kind of stuff.

But the average user, you and me well, we're not going to do that.

Not to mention it's a bearer asset, so you don't want to keep it on you, like if if you know, i don't hold a lot of bitcoin, but i could imagine, like if i did, i wouldn't want to be broadcasting like yep, but i've got it right here on my computer with me.

You know, it's a, it's something where you want you want the asset to live kind of at an arm's length from you personally.

This is how the feds seized all the Bitcoin from DPR when they raided Silk Road.

It was just there on his computer.

Makes sense.

It's effectively like walking around with millions of dollars in cash lining your jacket pockets.

You want to keep that somewhere else?

Yeah totally, and not just under your mattress.

So coinbase does yc.

Summer of 2012.

They raise a seed from initialized and angels right afterwards.

Then they raise an a from union square ventures.

Then they raise a b from andreessen.

They start building all this infrastructure, making it secure.

Now they're huge.

This is great for the.

The other really interesting story.

So Coinbase is basically like, you know, they have Coinbase Pro now and institutions use it too.

But like it makes it retail accessible to you know, just like Schwab, just like Vanguard, etc.

Or a bank.

Robinhoodification of crypto.

Exactly.

And of course, now you can do trade crypto in Robinhood itself, too, and in Square.

And I'm like all right.

So Coinbase is sort of attacking the retail side, if you will, of people interested in crypto.

There's an even bigger prize out there though, that people start to realize, which is, you know, getting the retail customers.

That's great.

But what if you can get institutions?

As this becomes an asset class, you're going to start to have hedge funds endowments, company balance sheets themselves.

Large pools of capital are going to be interested in also playing in this ecosystem.

Well, what kind of infrastructure do we need to make that happen?

And that looks actually pretty different than just retail infrastructure.

So here is where the story takes another just incredible turn.

I don't know where you're going with this.

Remember I said the social network would come back into play here.

The Winklevoss twins.

It's been so fun to like read about this and I've gone and watched a few videos with them.

My opinion has completely changed from doing this research.

So of course, people probably know the story of the Winklevosses as part of the origin of Facebook and the social network.

And that there are two twins who were a few years ahead of Mark Zuckerberg at Harvard.

And they had had the idea for what became Facebook and hired Mark to be a developer for them to help build it.

And then allegedly Mark had said, Hey, this is actually a really good idea.

I'm just going to go do it myself.

Um, There was a big lawsuit about this.

They sued Mark in 2004.

It was eventually settled in 2008 for $65 million settlement payment from Mark.

That's a nice down payment on some Bitcoin.

Well, here's where the story gets really interesting.

So at the time, everybody thought this is crazy.

Like, you know, it's the line from the social network.

If you'd invented Facebook, you would have invented Facebook.

Ideas are cheap.

Execution is everything.

These guys are crazy.

They don't know what they're talking about.

Maybe that's true.

But these guys are also really smart.

So when the settlement happened, $20 million of the settlement went to legal fees.

So they got $45 million before taxes.

And everybody was like, this is great.

You're going to be set up for life, et cetera.

They were rowers.

They actually participated in the 2012 Olympics.

You guys can just go be athletes.

They said, no, we don't want the money in cash. we're gonna take the money in Facebook stock.

So they took all $45 million in 2008 Facebook stock.

There's this great quote on this.

Cameron says in a New York Times article the lawyers thought we were crazy for taking the money in Facebook stock.

We thought they were crazy for taking their 20 million in cash.

The stock that they get by the time Facebook goes public in 2012 is worth around $300 million.

And in the interim in the previous four years they moved to the UK because the 2012 Olympics were in London.

So they come back in 2012.

Facebook's gone public.

They're worth $300 million.

And And.

The story is that they're on vacation in Spain after the Olympics and they meet a guy there from the US who starts telling them about Bitcoin still really early.

Coinbase was just going through YC at this point in time.

And Cameron and Tyler.

As they start to learn about it and think about it, they realize like holy crap, this is money with network effects.

So they go all in on Bitcoin.

They don't put the whole $300 million in.

That would have been like the whole market cap of Bitcoin itself at the time.

But they start buying Bitcoin in summer 2012 at about $10 a Bitcoin.

They end up accumulating well over $100,000

Bitcoins that cost them under $10 million.

And it was 1% of all Bitcoin outstanding at the time.

Wow.

Totally incredible.

They say, what if we build an exchange specifically for institutions like Coinbase have retail?

So they start and fund an exchange called Gemini, which still exists today, with the whole target of being certified by regulators for institutions.

They end up getting a license from New York state regulators that allows them to be a.

And then, a few years later, in 2017, when the Chicago Board of Exchange launched Bitcoin futures on the CBOE, which was a huge moment, a big part of the run up of Bitcoin in 2017.

It was actually Gemini that was settling all the futures on the exchange.

Crazy.

So super interesting.

I mean, thank God that like.

Coinbase Gemini.

There were others out there as well who saw like hey, the future is bright for Bitcoin if we can start to build some real institutions that work with regulators that people can trust and are going to be legal.

Otherwise, everything's going to go down in flames with Mt.

Gox.

So, through all this, Bitcoin as a asset keeps growing, with an insane amount of volatility, of course, which still continues to this day.

Bubble after bubble, after bubble, and you know pop pop, pop yep, but with each bubble it keeps going higher, and then the new floor price resets higher.

2012, the price started at five dollars and twenty seven cents per bitcoin.

By the end of the year, it's at thirteen dollars and thirty cents.

And And then 2013, this was the huge breakout year.

So even despite Mt.

Gox and Silk Road and everything going down the tubes started the year at just over 13, as we said.

By the end of 2013, January 1st 2014, Bitcoin is at 770 per Bitcoin exchange rate.

That is some serious appreciation in just one year.

Yep.

And then I think even after that, then fell down to like 200 or something like that was the next.

So then when Mt.

Gox finally disappeared.

In those three quarters of a million plus Bitcoins disappeared.

That was a huge hit to the system.

Price fell down to about $300.

And then 2015 mostly stayed in that sort of three, four or $500 range.

Um, By 2016, though, all this infrastructure is starting to come online.

Coinbase has raised a lot of money, lots of accounts being created.

They're seeing very high trading and exchange volumes.

Same with Gemini, same with other exchanges.

By the end of 2016, the price hits $998 per Bitcoin.

So just a hair under $1,000.

Dollars of Bitcoin.

I mean, this is now the beginning of 2017.

What was the six years earlier?

You could barely buy a pizza for 10,000 Bitcoin.

Yeah, it's totally fascinating to think about.

You know, I keep referencing this 3 million X, the number that we've talked about.

The initial 35,000 X was in the first five years, making it to 350 bucks in 2015.

And in the five years since it's actually only been an 85 X.

A lot of that sort of multiple happens in those early years, well before it even hits 1000 a Bitcoin.

Well, what's so cool is that this is exactly how the venture capital markets work, right?

It's the early stage investments that you can generate those huge, huge multiple returns.

But you can't put that many dollars to work in the early stage investments.

So like you'll generate you know Sequoia has figured this out and so many other, the big firms you put dollars to work early, you get huge multiples on those dollars, but then you keep putting dollars to work in subsequent rounds as companies grow, get proven more and the TAM expands and the market for you to be able to put those dollars to work expands.

And so like, It's not just that you want to get the $3 million X on your first dollars.

You also want to get the $85 X on a lot bigger base that you're putting in later.

Yeah, it's interesting.

I mean, it's just especially interesting.

It's a little bit of like...

As we'll get into the analysis later, I think we'll see how crazy this is.

But it's strange comparing all these companies, all these corporate assets to a monetary asset, because it's not apples to apples in the way that we normally think about these types of investments.

Like, This is a currency.

The idea is that it's eventually going to be just a way that we store and transfer value.

So it's just funny that everything we've talked about so far is about growing the value of each fraction of the Bitcoin network.

A Bitcoin.

Yep.

But this is the moment where things kind of tip.

Bitcoin mania begins.

In 2017.

Holy crap.

Yep.

January 1, 2017, we're at $998 a share.

People are like, $1,000 in Bitcoin.

There's some real money here.

And what does that attract?

That attracts grifters.

So people had already launched other crypto projects over the previous six, seven years.

Ethereum launched in 2015.

There were others.

There were, of course, we referenced all the altcoins and parity coins, like There's so much to say about Ethereum here, about DeFi, about a lot of the more modern takes using the blockchain, using cryptocurrency, outside the scope of this episode.

But, you know, obviously those things are interesting.

Yeah, we will definitely talk about those in the future.

But in 2017, people realized like, man, this is a money machine.

So in May folks may know, folks may use.

It's a real company, real project, the Brave Web Browser website, which is a privacy by default, you know, non-tracking web browser.

They launch instead of raising venture capital in a normal route.

They do this thing that they call an initial coin offering, which is the same thing that Ethereum did.

You know, anytime you're starting a new blockchain based project, you have a launch, just like Satoshi Bitcoin.

Mine the first 50 Bitcoins to bootstrap up the Bitcoin network.

Well, Brave sells the initial tokens and they market it and they have white paper and all this stuff and people go nuts.

They raised $35 million from this ICO in 30 seconds.

In fully non-dilutive capital.

Fully non-dilutive capital.

People start talking about like, This is the new way to raise money.

This is the new way to start companies.

VCs themselves go gaga.

They're like, oh, wow, we're just going to invest in ICOs from now on.

It's like crowdfunding.

You're raising money from your users.

So all the incentives are aligned because as it increases, it's going to increase with the value of the product.

Blah blah, blah.

It's totally unregulated.

Yeah.

So everybody and their mother, literally everybody and their mother has ICO in 2017.

It's like the SPAC of 2017.

DJ Khaled has an ICO.

Paris Hilton has an ICO.

Floyd Mayweather has an ICO.

Like... unclear what any of these projects are.

I was going to say, because the rationale for creating your own coin is that I'm creating.

I think they were dApps, right.

Distributed applications or are dApps.

But I'm creating a distributed application and it's going to have a network effect and there's going to be a bunch of people that use it.

So like literally, the value of the pseudo virtual currency that you use on the platform will increase in value with more people using the platform.

Like In the abstract, it makes sense.

In the same way that in the abstract, Bitcoin made sense.

The difference is largely just in what actually then happened.

Yeah, totally.

And who was pumping up these things.

So, you know, Bitcoin starts the year at $1,000.

There are a lot of people out there who have made a lot of money just holding or hodling, which we should.

HODL, H-O-D-L.

Is it a misspelling of hold or is it hold on for dear life?

People have said both, but I think the original.

It was a guy on a forum who, during one of the bubble crashes for Bitcoin price, was encouraging everybody to hold and not sell.

And so he just typed too fast and said HODL.

It just becomes an internet meme like boom goes the dynamite or any other.

Oh, I haven't heard that in so long.

So good.

They're like, okay, cool.

These ICO is great.

We'll pump the money into the ICOs.

Yeah.

So by May, when the brave ICO happens, price of Bitcoin has doubled to 2000 by the prevailing exchange rates, USD.

By September it's 4000.

Yeah.

By the next month in October, it's $6,000.

By November, it's $10,000.

And by December 18th 2017, we hit what many then, later over the coming two years, would believe would be the all-time high 1978306 per Bitcoin.

Unreal.

$20,000 per Bitcoin.

Yeah.

And so this is like...

For the record, I was very much in the camp at that point.

At that point, I was cashed out.

I was like, I'm done with this mania.

There's all kinds of ICOs.

There's all these scammers, altcoins, who knows what's going on.

So many scammers.

And I definitely was like, this is totally inflated and the highest it will ever go.

I definitively remember thinking that.

I mean, it was... I remember, I don't think...

I had taken a little money off the table during the run-up from, not that I had or have many Bitcoins, but from my experimentations buying a few in the early days.

So I'd taken some money off the table in the run-up, but then after the crash, which happens in the beginning of 2018, I was like eh, I don't know.

I don't need the money, whatever.

It's an option.

Let's see what happens.

I'll just let it ride.

I let it ride.

I huddled.

All right.

So catch us up.

This January 2018, we see this run up to near 20K.

It falls.

Clearly, it has risen again.

What's happened in the last couple of years?

Okay.

So over the course of 2018, it falls from 20K all the way down to under 4K.

So at the end of 2018, by January 2019...

Bitcoin is trading at just over $3,700, down 72% for all of 2018, and down 81% from the high in December 2017.

And many of them prosecuted for fraud.

Yeah, many of them.

The regulators got involved, of course, and VC firms regained their sanity and started investing in normal companies, as well as normal companies doing things with crypto and Bitcoin and blockchain.

And some actually into cryptocurrencies themselves, but often a little bit more mainstream than into the ICOs.

DJ Khaled coins.

Yeah, altcoins.

Yeah.

So, in the background, all of this, the groundwork that Gemini and Coinbase and others started laying, that kept getting built over 2018, 2019.

So in 2018, Square added the ability to buy sell, trade and hold as a custodian crypto natively within the Square Cash app.

Robinhood did the same within Robinhood in 2018 and then rolled that out, I think by 2019, to their entire user base.

And so you get to the summer of 2019 and Bitcoin, which again had financed a lot of this ICO boom, but from profits that people had made in Bitcoin, but was totally unrelated.

The price has recovered to about $13,000 per Bitcoin by summer 2019.

And things continue roughly in that trajectory.

And then we get to March 2020 and the world changes.

All the people who have been screaming for the last five plus years that this is an uncorrelated asset.

And boy, oh boy, would it be nice to own some currency that's not fiat, that's not connected to a single government.

If we head into, you know, if we have a black swan event, that happens and the world is falling apart.

You don't want to be associated with any specific government and you want to have currency that is uncontrolled.

Blah blah, blah.

Like, boy, is there an opportunity to prove you are right?

Yes.

Now, so here's what's crazy.

So obviously COVID hits the broader world in March 2020.

And when there's that initial dip in the markets and panic selling and everybody thinks the crash is happening and equity markets sell off.

Actually, crypto and Bitcoin sells off too.

So the price of Bitcoin crashes.

And on March 13th, 2020, remember it had been trading around 13, $14,000 per Bitcoin.

It crashes down below 4,000, which is crazy.

So it's the exact opposite of Ben, what you were saying, what you would think like.

Hey, I want to own Bitcoin when the world's falling apart.

Dude, I remember watching that and like looking at the S&P 500 overlaid with the price of Bitcoin.

And I was like, huh, it's a pretty correlated asset class.

And, of course, now we know with hindsight what was actually going on was there was a liquidity run and people who are holding Bitcoin were also holding other things.

They had obligations.

And then as all the markets crashed, they needed liquidity to be able to pay off other things.

And at that moment.

But since, just like the equity markets, it recovers quickly and just starts taking off.

And then Ben, like you were saying so, the Fed and the US government, in response to COVID, just starts printing money like crazy crazy, like has never been done in our country ever before, like World War II any other time.

So during 2020, literally 22 of all of the US dollars in circulation all around the world are created in 2020.

The debt to GDP ratio of the US goes from I think it was I don't remember exactly somewhere like 60, 70 to 135 over the course of 2020.

And this is, of course, financing all the stimulus packages and all the spending that the government is doing without the revenue to back it up.

And of course, meanwhile, we're in a zero interest rate environment.

Yeah.

So there's sort of two things that are happening in order to do the economic stimulus.

One.

The government is using tax dollars to pump money back into the economy, paying people and implementing programs.

Not tax dollars.

They're creating dollars, too.

But they're doing both.

It's tax dollar allocations and the Fed is printing more money.

And so they're putting, more dramatically, more money into circulation, which one way to think about this, for I spend a bunch of time trying to figure out, like what's the best way for me to understand this.

Because I always feel like if I can understand it, then it's a pretty good proxy for everyone listening.

And my sort of notion of it and I'm sure this is not exactly right is if you're a shareholder in a private company and you go raise more money well, you take a bunch of dilution usually 15 to 30 dilution because you're creating new shares for the shareholders.

We were effectively saying hey, everyone with dollars you're going to go take 20 dilution in 2020.

Your dollar is going to buy.

You just going to have less purchasing power because there's more dollars in circulation right now, just so that there's more dollars to go around which of course is- And it takes a while for that to percolate through the system that you actually see 20 higher prices, but eventually that will come home to roost.

Yeah.

So I don't think either David or I are smart enough macroeconomist type people to be able to interpret we're in a zero interest rate environment.

The government printed a bunch of money into the money supply.

We did away with the requirement that banks hold 10 percent of capital in reserve.

They're loaning out.

Yeah.

Like there's a lot of.

But I don't think you or I should be here.

No.

But I think what we are maybe not smart enough, but what we're enough to feel, that we feel certainly influenced my actions, actions of many investors and people all around the world probably yours too is the effects of this, which is interest rates go to zero.

So all the money that I was holding in my bank account that anyone was holding in their bank account earning interest on it, was already really low and had been since 2008.

Now it's zero.

Like I was getting emails every two weeks from my bank being like hey, we cut your interest rate again.

Yep, exactly.

And so what incentive does that create?

That creates an incentive to just not hold cash, like if you want or and not hold bonds either, like anything that's traditionally relatively conservative investments that, as an individual or an institution, you would hold and expect to get three, four or five percent return on.

You're just, you're not getting.

You're Well, so what does that mean?

It's like a balloon.

You're squeezing one end.

You're just going to push people to go invest in places where they can get return.

And where's that going to be?

That's going to be equities and Bitcoin.

And specifically tech equities, and specifically specifically early stage tech equities that people hope are going to look one day like Amazon.

So that's like what's happening in the equity markets.

And of course, alternative assets like Bitcoin.

And so you sort of have the coupling of people, you know, capital desperately seeking returns.

So it's there's more capital ever that's looking into and taking things like cryptocurrencies seriously.

And also people really buying the story of wait.

Tell me about the fundamentals of how the Bitcoin system works again.

Huh, that actually does seem more and more reasonable.

And huh, all these other people are into it?

Okay.

Oh, and a lot of legit people have parked a lot of cab?

Okay.

One could argue, is starting to show the cracks of what happens in quantitative easing, what happens in zero interest rate environments, what happens in not having hard requirements about fractional reserve banking.

You actually start to see the way that the Bitcoin system was designed to work.

Fix all of that.

Like hey, we can't increase the money supply, it is what it's going to be at 21 million.

And you know hey, there there is no fed.

Like there is no centralized, you know place that you have to have trust in that they're going to effectively manage it.

A lot of these ideas just become more appealing at the same time as there's more capital seeking more returns.

So it's this like perfect storm of uh, the conditions created people rushing into cryptocurrencies and and Well, specifically Bitcoin, but also specifically institutions, this time.

So, like all the bubbles in the past, it was individuals, it was retail, maybe it was some venture firms, maybe it was the Winklevii who were buying Bitcoin.

But now...

Enough infrastructure has been laid through exchange traded funds which now exists, like Grayscale, through Bitcoin futures, through custodians like Gemini and Coinbase Pro that if you're a hedge fund, or if you're a bank, or if you're an endowment or if you're a company treasury, you actually maybe can access Bitcoin.

Right.

So in May of 2020, Paul Tudor Jones, the famous investor who runs, I think, a 22 23 billion hedge fund, he goes on CNBC and he says hey, I actually have between 1 and 2 of my fund's assets in Bitcoin.

And at a 22 billion fund, that's two to 400 million worth of Bitcoin that had just come into this investor money.

Yeah, not his money.

It's fund money that has just come into Bitcoin.

Then, in August of 2020 MicroStrategy, which is a publicly traded uh investment firm.

Uh, they reveal that they have 250 million in Bitcoin.

Uh, Not just that they've invested in Bitcoin, but they're classifying it as a treasury reserve asset on their balance sheet.

So not like an equity speculative investor.

This is like, no, like we're classifying this like a cash in our treasury.

Then in August Square which, of course, has been part of the crypto and Bitcoin community for a long time, They put about 1 of their cash and cash equivalents on their balance sheet on their treasury into Bitcoin about 50 million.

So they're the first like operating company that is now saying we're going to have part of our cash in our treasury that we're going to hold in Bitcoin.

Bitcoin.

Also their rationale for why they did that and how they executed the trade is really well documented.

They wrote it up.

We'll link to it in our sources.

It's worth reading that post.

I think it's a PDF if anyone's interested.

And then the last big announcement in November Guggenheim, which is a very large asset manager.

I think they have about 200-300 billion in total across all of their vehicles.

One of their funds, which is a 5 billion fund, they register with the SEC to be able to invest up to 10 of the funds.

So up to $500 million in Bitcoin via exchange traded funds by doing that.

So what's the net of this?

So you've got, even just across those transactions which we mentioned, which are ones that are public.

There's plenty more, I'm sure, that we don't even know about, where managers haven't disclosed their holdings.

You've got close to a billion dollars of inflows flowing in to this asset class.

It's not a super thickly traded asset class, right?

Like the market cap for all of Bitcoin as we're running up here is in the 650 billion, right?

That's a today's prices.

But as these transactions are happening, you know it was probably ranging from one to 300 billion in Right.

And keep in mind, only three-ish billion of the 21 billion coins that ever will be.

So there's 21 million total.

There's something like 16 million have been mined so far, maybe a little bit more.

A little more, I think.

But only three million of those are actually ones that are traded.

The rest are held long term, lost, whatever.

Exactly.

The Silk Road coins, the Mt.

Gox coins, the Satoshi coins.

There's a whole swath of millions of coins that are just gone.

They can't trade.

Then you've got all the coins that people don't want to trade, that they're holding like yeah, I'm not going to sell those.

Right.

Why would you use this thing as currency right now, when it's inflating so much, like when it's appreciating so much?

It's like you'd have to be out of your.

You understand the hodler mindset which, of course, also which we haven't talked about yet.

And I think we'll get into an analysis like you can't really spend your Bitcoin at any retailers.

But of course you can't because who is going to spend these things right now?

Right.

Because so as you know, what is price?

It's the intersection of supply and demand.

You've got these huge new chunks of demand like blocks of demand sizes that have never been seen before in the asset class.

You know 100 million, 200 million dollars at a time that want to come in and buy.

You've got not a lot of supply willing to sell.

Of course, the price is going to go through the roof.

So that's what happens.

All right, listeners, it's time to talk about another one of our favorite companies, Statsig.

Since you last heard from us about Statsig, they have a very exciting update.

They raised their Series C, valuing them at $1.1 billion.

Yeah, huge milestone.

Congrats to the team.

Timing is interesting because the experimentation space is really heating up.

Yes.

So why do investors value StatSeg at over a billion dollars?

It's because experimentation has become a critical part of the product stack for the world's best product teams.

Yep.

This trend started with Web 2.0 companies like Facebook and Netflix and Airbnb.

Those companies faced a problem.

How do you maintain a fast, decentralized product and engineering culture while also scaling up to thousands of employees?

Experimentation systems were a huge part of that answer.

These systems gave everyone at those companies access to a global set of product metrics, from page views to watch, time to performance.

And then every time a team released a new feature or product, they could measure the impact of that feature on those metrics.

So Facebook could set a company-wide goal like increasing time in app and let individual teams go and figure out how to achieve it.

Multiply this across thousands of engineers and PMs, and boom, you get exponential growth.

It's no wonder that experimentation is now seen as essential infrastructure.

Yep.

Today's best product teams like Notion OpenAI, Rippling and Figma are equally reliant on experimentation.

But instead of building it in-house, they just use Statsig.

And they don't just use Statsig for experimentation.

Over the last few years, Statsig has added all the tools that fast product teams need, like feature flags, product analytics, session replays and more.

So if you would like to help your team's engineers and PMs figure out how to build faster and make smarter decisions, go to statsigcom slash acquired or click the link in the show notes.

They have a super generous free tier, a 50000 startup program and affordable enterprise contracts for large companies.

Just tell them that Ben and David sent you.

Well, David, as we catch up today, I want to point out there's one institutional firm, Paradigm, that is co-founded by, I think it's Fred Ursham and Matt Huang.

Matt, of course, is a former Sequoia partner.

Fred is a Coinbase co-founder, definitely the president.

He was Brian's co-founder.

The two of them co-founded it.

And so Matt had made this really great point.

If I could tell you to do things to follow up.

One is obviously the Bitcoin white paper, remarkably cogent.

The other is actually reading Matt's piece about sort of his summary of Bitcoin.

It's at paradigmxyz and sort of like, Why we're doing what we're doing, why we think it's interesting what the trade-offs are, where it could go wrong, where it could go right really cogent analysis.

But one of the things he points out is, of course, Bitcoin has these bubbles.

But, as David mentioned, every time they pop it sort of plateaus at a higher level than the previous bubble.

And because Bitcoin requires this network effect to be valuable, it is a self-fulfilling prophecy in a lot of ways.

It actually uses bubbles as a go-to-market strategy where every time there's a run-up, there's more and more legitimate players and more and more institutional capital.

That sort of pile in more infrastructure gets built up.

What is left?

There is all that infrastructure and all that advancement that was made from the mania and the hype.

And it's just really interesting to see that really is a go-to-market strategy.

Well, and what's so interesting about this time and unique, and we're already seeing this play out in how the price has risen, fallen and then stabilized over the past couple of weeks is is in previous bubbles, it was mostly individuals who are doing this, who are subject, of course, to individual psychological behaviors and price crashes.

Lots of people are going to sell.

Lots of people will hodl, but lots of people will sell too.

This time the demand, the big chunks of demand, that's driving up the price.

This is Square's balance sheet.

This is MicroStrategy holding this as a treasury reserve. they're not going to sell.

They're investing purposefully as treasury and as diversification.

The price crashes 50%, 70%.

They're not going to sell.

They're institutions.

And so part of the thinking here is that, as we now move and shift into this new phase of Bitcoin, where institutions are playing within it, there's going to be a lot more stability.

So what's happened with the price over the last month or so.

So we went from.

We went from 3700 in March during the COVID liquidity crash to by the end of November.

Bitcoin surpasses that all time high of December 2017, hits 19860 in November.

And the Then by the end of December, by the end of 2020.

On New Year's Eve, we're sitting at 29000 for a Bitcoin, which is insane.

Another $10,000 in a month.

It doesn't stop.

The first week in January, which was last week, even though it feels like last month, it hits 40000, 40000.

Ultimately, the price goes all the way up to 42000 per Bitcoin, before coming back down again several days ago over the last weekend, even though it feels like a month ago coming back down to a low of about 30000.

So the crash quote unquote we could have another crash like we don't know, but this crash is still 10000 above the previous high.

And is now trading right around $35,000.

Right, which it has for the last several days.

So by crypto timelines, at least by Bitcoin timelines, it's stabilized super quickly at this sort of 34000, 35000 price.

This is very different than the way these bubbles and crashes played out before.

By the time we release this episode, we could be at Bitcoin 15K, but...

Could be at 3K, could be at 100K.

You know, we don't know.

We may look stupid.

But I do think it's really interesting that you have different motivations this time of large blocks of capital that are coming in.

Yep, for sure.

Okay, before we transition to analysis, there's like a couple of like today's stats that I think are just sort of interesting.

Because I continue to be interested in comparing Bitcoin to a company, to a currency, to assets under management.

So this $35,000 a coin price implies a market cap of $650 billion.

Right.

Well, let's contextualize that $650 billion.

So the total consolidated assets of JPMorgan Chase, the largest bank in the United States, is 3 trillion.

So that's about five times all the Bitcoin out there is, like at JPMorgan alone, from people who bank with them, is five times bigger.

Sort of an interesting number to keep in mind.

Um, i think bitcoin, if you were to, if you, it's actually pretty interesting.

You go to the federal reserve's website and just look at, like what's, what are all the settled accounts like, not within each bank, but at each bank, how much money do each does each bank in the us with a bank charter have on hand or, or um, in under their custodian?

Interesting actually, not on hand specifically, like how much do they are they a custodian for?

So I think Bitcoin would be like the fifth or sixth largest institution on that list if it were a bank that was regulated by the Fed, which is kind of interesting.

It's also interesting just to compare it to like the market cap of Apple is $2.2 trillion.

So four-ish times as big as Bitcoin is.

If you want to think about it sort of like, how valuable is it versus the most valuable company in the world?

Another sort of interesting number to think about it, especially as later we will start thinking about what is the TAM for Bitcoin.

What's its total addressable opportunity?

Not necessarily for a coin individually, but like for what could all of bitcoin represent to the world at some point in total?

And then, because we know it caps out at 21 million, you actually can kind of do the math and be like all right, what would the coin value be at that point?

So the total money supply of us dollars is about 20 trillion david.

As you mentioned, it was about 15 trillion in january of 2020, so it's it's gone up quite a But again like Bitcoin, about halfway to 1 trillion compared to the US money supply over 20 trillion.

Another interesting number to know is that the total money supply of all global currency is about 70 trillion.

So there's this interesting, or was, I think it's gone up a little bit.

So it's sort of interesting to think about like, If you're someone who believes that it's going to overtake all currencies, then you can sort of look at that 70 billion number.

If you think it's just going to be a sort of asset that gets held, it's a part of a portfolio.

A lot of people are likening it to gold.

Which is about 9 trillion, nine trillion.

About about half of it actually is in jewelry.

So you're not going to replace like no one's going to have.

Actually there is some tell that to coin daddy yeah, but it is interesting to look at like okay, there's about four and a half trillion dollars of gold out there not used in jewelry.

It could sort of usurp that it's kind of digital gold um, which you know we'll get into all this as we transition analysis here, but sort of interesting to understand the scale of it in today's world Yeah.

Crazy.

I mean, it's come a long way from the white paper.

Like this is such an improbable journey, you know, white paper, to Papa John's, to Silk Road, to Magic, the Gathering, to the Winklevoss twins to, you know, to Guggenheim, investing in it.

Right.

Like this is all within 12 years.

Yeah.

I mean, it's an improbable story, but you sort of needed all these different factions and all these different vested interests and all these different true believers versus opportunists to sort of push it forward to where it is today.

All right.

Power?

Yeah, let's do it.

And listeners.

For anyone new to the show, this is a section that we put in based on one of our favorite books called Seven Powers, which is a study of how businesses can achieve persistent differential returns, or put another way to be more profitable than their closest competitor, on a sustainable basis.

And so what we mean by power here is what is the thing normally of a business in this case, of a currency or a new money system?

Um, that that basically allows them to out compete their closest competitors and gives the business for lack of a better word power.

Yep, and this is going to be so fun, because i think they're a bunch that bitcoin has, uh like a whole bunch.

Um, the obvious one that we've been banging the drum on through the and is probably the most powerful, is network economies, I think.

In particular, versus other cryptocurrencies.

Ethereum is the only one that stands a chance and it just kind of has a different use case.

That's really more around the smart contracts and compute.

That's sort of built into it.

But for sure you can't start anything that looks like Bitcoin now and have any chance of beating it.

It's In the same way that Facebook just outran any other consumer social network, consumer social entertainment type app and then was obviously very smart in acquiring those who did get scale.

Bitcoin just leapt ahead at the beginning of this paradigm.

And I think what's cool is it even applies at the technical level too, with this idea of the amount of computing power that has gone into maintaining and making robust the Bitcoin network over time is itself a compounding asset, right like because the more power that goes in over time, the harder it is to crack undo.

Yeah, you can't.

There is no supercomputer that could conceivably ever be created that is going to as long as the bitcoin economy, like a miners, keep working, that is going to be able to go back and like, redo everything, and that, what that lead, just keeps getting wider and wider and wider.

Certainly not really old things in the blockchain, but there's always the risk on the newer ones, things that are only two or three blocks behind.

And unless there's a paradigm change, like unless quantum computing arrives and suddenly you have 10 million X more compute than we did in the past on a single core or something like that.

Well, this is also where network economies come into play, and Satoshi actually makes this point in the original white paper.

Like, let's say that happens...

As long though, as the network is big enough and robust enough, at that point the value of legitimate, keeping the system legitimate like say, you already own Bitcoin.

It's a great point.

If you already own Bitcoin, then your incentivized interest is not to break the system.

Because if you hack it, then people lose trust.

And then the value of the Bitcoins that you already hold which presumably, if you're a miner, you've already been mining.

They go down down.

And so, even if you could create more fake Bitcoins for yourself, you have this massive disincentive to do that as more people join the system.

Yeah, that's a great point.

And if the other thing that the system is designed to do is to provide enough incentive and of course they rebalance this over time but provide enough incentive to the miners that if they were to make a call between being a and mining, they should make it worth your time to mine to be white hat.

And so if you had access to a quantum computer, they would adjust the software such that it would make more sense for you to mine than it would to attack.

Of course caveats abound here that David and I don't know jack about quantum computing, except that maybe it'll be a big leap forward in the amount of compute per square inch or per square watt or whatever.

Square watt's not a thing, obviously, but per unit.

So network economies, absolutely.

One that I wanted to bring up that I think is interesting is it's counter-positioned, but not against other cryptocurrencies.

It's counter-positioned versus the US dollar where uh, the definition of counter positioning um, you know, of course, with my editorial here is doing something that your uh, that incumbents basically can't because they would break, break their system yes, and like there is no better example than than the us dollar, like if The Fed was like Bitcoin's, a really good idea.

And they felt like actually that's the future.

They cannot.

The Fed's centralized infrastructure and the US banking system, like the notion of the central federal bank or the Federal Reserve, like it is completely antithetical to everything that Bitcoin stands for.

Like our monetary supply and our entire banking system exists in a coupled very intentionally coupled manner with our government.

Right.

And so it's not like it would ever be in the US government's interest to be like.

You're right, a decentralized thing would be the way to go, because it removes so much of the power of the US government.

Frankly, the US as a nation.

Yep.

Well, and just like network economies, I think there's another level that that counter positioning applies at too, which isn't just the U S dollar.

It's at the financial system itself.

Like we started the episode with, you know the way banks work and the way credit card companies work.

The way traditional financial institutions work is based on this you know number, bank account number of credit card number system and they can't go back and change that and make it into a public-private key thing.

The best that they can do... I think they could.

They could.

But all those ACH, How are you going to coordinate every bank out there that talks to every other bank to now, all of a sudden, Federal mandate, in the same way that we moved to chip and pin?

That's true.

They could...

They could adopt a superior and more secure technology if there was enough of an incentive to do so, but they could not change their centralization versus decentralization strategy.

Because, to bring in another sort of mental model, the US government and all governments who have fiat currency have bundled the safety, security and amount of normalcy or normality of the nation with money.

And like when people say the us dollar is backed with the full faith of the us government, like that that is literally true, it is legal tender.

Like at some point, if you're like conducting business on a large scale, and the government's like can you accept us dollars please?

And you're like no, like they do have an army, so that they're they're, they are intertwined intentionally and it is strategic to be able to, to make it so that our economy runs on our government's currency, and That's been a strategy that's worked really well for a long time.

And I don't think an existing government who is the strongest nation in the world can.

It's literally a definition of counter-positioning.

They would cannibalize everything they've built by switching to a...

What I'm talking about is more like.

This would be hard for the traditional banking system to do, but it's not against their interest to do it, whereas it's actually against the US dollar's interest to refashion itself like this.

Yep.

It's funny.

In this vein, one thing that dilution idea I was talking about earlier, where I was comparing adding new money to the money supply to the sort of dilution of your shares in a company.

I'm pretty sure that the vast majority of US dollars are actually held by, but like held outside the US by people that are using it as hey, this is like.

This is the way that the world denominates value.

It is the, I can't remember what the phrase is, but like the reserve currency, I think.

Yeah, yeah.

And it's something like 70%.

Don't quote me on that, but it's more than half is held outside the US, And so when we do things like print more money, it actually hurts everyone else more than it hurts us.

And you can kind of do that to a certain extent.

Obviously, if you do it too much, you create a huge problem and then you create this sort of hyperinflationary thing and people don't trust it as the global reserve currency anymore.

But if you're like, you know what?

I'm going to basically dilute everyone by 10 and they're going to take the hit a lot more than we are.

That's what we're doing.

That's actually a really good point where yes, you're hurting your own citizens with inflation right.

But you're also hurting these other countries whose central banks are holding your paper, your dollars.

That's something that, like your own citizens, there's kind of nothing you can do short of like moving to another country if you're a citizen and you don't like this.

But if you're another country's central bank, at a certain point you're going to be like, screw it, I'm going to use a different asset as my reserve currency.

Like you can make that choice.

Yeah, and unlike what, to roll back to that early Facebook example when Zuckerberg did the Eduardo Saverin dilution move where he issued a crap ton of new shares to everyone except for Eduardo.

You can't do that, where you create a whole bunch of new money.

I guess actually that's sort of what we're doing with the federal stimulus.

We create a bunch of new money and then we only give it to US citizens.

That actually is.

You can only trot that pony out.

It's like the social network again.

Yeah, you can only trot that pony out so many times.

Yep.

Okay.

I think there's some more in here.

It is a thousand percent of cornered resource.

Like there's a finite number of these things available.

So like it is written into the software and that it's, you're never going to increase the money supply.

So like it is quite literally a cornered resource.

Well, it's cornered resource for people who own it for the system itself.

Oh, that's a good point.

It depends who the actor is that you're considering here.

Certainly, though, for anybody who holds Bitcoin, like absolutely.

This is the fact that there is programmed in, you know, minimal to no inflation in the long term is an incredible source of value.

Not to mention, it's like the most secure system to ever exist, this public-private key pair thing.

Think about Satoshi.

You got a million and a half of these things and it's so secure that like people can't even log in to view their own you know, because they're losing it.

Like it's, you know, you got super cornered.

It's not fleeing anywhere.

So let's talk about, I want to explore scale economies.

So I think there's scale economies here, but let's talk about it.

So scale economies, of course, being like Netflix like because Netflix has so many subscribers that they make so much monthly revenue from they can go pay 100 million for a piece of content and amortize it over all those subscribers that a smaller service, say like Peacock or whatever, can't afford to pay the same amount for that content profitably.

In this case, I think it might apply to the mining pool resources.

So if people are going to mine, you could mine any cryptocurrency, right?

But there's gravity to Bitcoin, right?

People are going to mine yours if they think it has the most potential future upside and staying power.

Right.

And because lots and lots of other people are mining... and transacting that's creating well maybe this is back to just network economies instead of scale economies certainly there is uh for let's look at the mining industry itself certainly that is a scale economies industry now that's separate from the bitcoin system but if you want to be a miner right like the only way you're doing it at this point is with dedicated hardware and a data center in a very special location exactly like you you're not doing it with a laptop right and and it's because like so many people have like a lot of the value has gotten arbitraged out of doing it by lots of other people trying to do it and it's a race once you find a block so you have to have the lowest cost structure in order to be a miner which is exactly like netflix and and the like okay uh switching costs what do we think about switching costs you can exchange in and out of other currencies.

So I think switching costs are actually pretty low.

Yeah.

Even as a miner, you can probably repurpose your mining gear to other currencies.

There's transaction costs to switching in and out of other currencies, but as compared to ripping out an enterprise SaaS solution in sort of the Hamiltonian definition of it, it's pretty low switching costs.

I don't think there's process power in any sense here.

I think the last question is branding.

Would you rather say you had a thousand dollars to invest?

Would you rather do you put that in Bitcoin, because you know and trust Bitcoin versus something else.

I mean, I would, but it's more because of the network economies.

It's because I feel like if there's going to be a dominant cryptocurrency that is a huge part of our global economy 20 years from now, it's going to be Bitcoin.

And it's not because of the brand.

It's not because it's, yeah.

If something else had the same properties and dynamics and network behind its system and it were called something else.

Yeah, I don't think there's any brand power there.

Yeah, I think the last thing, the last thing to talk about in in power that I should have talked about when you were talking about network economies, is again going back to this comparison to the US dollar government backed currency has an absolutely enormous head start on their network economies power versus anything else.

Like the government mandates that you pay your taxes in USD.

So automatically.

It means that, like every single person in the country must own some amount of USD in order to pay their taxes in it, or at least they have to have to use it, or maybe they're like accepting their wages in it.

So money is flowing from literally every person in at least one direction in that currency.

So like that lights up a bunch of nodes on the network.

On the other hand, the government pays its debts or its bills in that currency.

So like it's getting paid out to every other country.

It's getting paid out to every contractor.

And like the government contractor industry is actually like it's a large part of the U.S. economy.

I don't know.

Oh, totally.

Oh, my mom's going to be so happy listening to a government contractor lawyer, government contracts lawyer.

Oh nice yeah, like it is.

Uh, i don't know if it's nice, but yeah it's it is.

It is a huge segment of our economy.

Um, the government is the customer, and so you like.

It's incredible anything can ever compete with government-backed currency.

Given how many nodes on the network are already by default dealing in government-backed currency, That might be a good transition out of power into our next section.

Yeah.

So listeners, what would have happened otherwise is our next section.

A lot of times we like to look at a specific event and wonder if it had gone in a different direction.

We may do that here, but we want to adapt this section to basically say let's compare this, Let's compare all the weird ways that Bitcoin works to the normal fiat currency system, to USD, and sort of compare and contrast some of the elements.

And the way that I sort of want to start is, like, what is money?

Like, what is the purpose of money?

And now we're getting a little bit, I suppose, academic here.

But it is three things.

It's a unit of accounts.

So it's the way that we basically say this thing is worth that much.

Like when you look at a gallon of milk and in your head, it sort of occurs to you how much it costs.

That's the unit of account.

It's the way that you account for the world.

It's a store of value.

So I made some money.

I put it in a savings account.

That's denominated in cash.

I'm going to come back and use that in the future.

And it's a medium of exchange.

It's the way that I buy apples at the market.

And, of course, then currency is sort of, in some ways, a subset of that.

It is literally like money in the form of however you pay for it.

So in the form of paper or coins, generally issued by a government, things like that.

So if someone were to say to me, Bitcoin is a bubble, I would say, for sure.

Like, no doubt it's a bubble.

Also, so is USD.

It's just a really long bubble.

How would you define bubble?

And again, I'm going to quote Matt Huang here from his memo, because I think it's super good.

His comment is, we can think of money as a bubble that never pops, or at least hasn't popped yet.

And the value of fiat currency, gold, or Bitcoin is relying on collective belief.

Other factors, like a government's power, the industrial utility of gold or the robustness of Bitcoin's code base can help reinforce this belief, but this belief is critical.

And I think there's something really interesting as we think about money or currency here.

It's not like a stock, right?

Where sure you could say like oh, Tesla is a bubble because it's you know relative to its current positive cash flows or any reasonable future positive cash flows that it could have.

Like you could argue like it's trading way way too high, above the sort of utility or intrinsic value of what you're entitled to as a shareholder of that company.

You know, you're entitled to the future profits of it.

Yeah.

Currency, definitionally, has no intrinsic value.

The only thing that gives it value is the collective belief that other people will continue to value it in the future.

Right.

Well, this is where you're getting to exceed our macroeconomic, academic and history depth here quickly.

Yeah, this is the argument.

Like before 1971, there was some argument about the US dollar, that it was pegged to gold and that you, you know you couldn't get as much gold as you could buy for a dollar if you turned in a dollar.

But you could get some gold.

Like there was some thing there.

But then after 1971, when Nixon signed that away and the US went off the gold standard yeah, it's just.

There's no different than Bitcoin.

Like it's just.

There is no tangible thing underneath it all other than your belief in the robustness of the US government as a system.

And hopefully I think what we've laid out on this episode is that with Bitcoin, it is the same.

You are believing in the robustness of Bitcoin as a system.

Mm hmm.

Yeah, it's really interesting.

Currency is anything that we're comfortable sort of using as this way of again.

The three points are a unit of account, a store of value and a medium exchange.

So most things actually are a pretty crappy form of currency.

If you can rip a dollar in half too easily, or if anybody could copy it and they didn't have serial numbers.

I'm going to keep quoting Matt here because it's just so good.

But he says, as with any monetary asset, Bitcoin must be scarce portable fungible divisible, durable and broadly accepted in order for it to be useful.

Bitcoin rates strongly across most of these dimensions, except for broad acceptability, which of course we've sort of talked about with the network effect.

So like the dollar is that if I had to sort of score it scarce, it's like it's reasonably scarce.

The issue is monetary policy.

Yeah.

Portable, certainly.

Again, not as portable as Bitcoin because like, if you want to carry a suitcase of a million dollars, it's kind of hard.

Fungible.

It certainly is that.

I mean, any dollar is kind of the same thing as any other dollar.

Bitcoin, I don't think Bitcoin wins at all on fungibility.

Divisible, they both have a tiny little unit.

There's cents, which, you know, represent the smallest amount that anything could really be worth.

Or there's Satoshis, which is one, is it one one thousandth of a Bitcoin?

One ten thousandth?

No, no, no, it's less than that.

It's one.

I think it's ten to the eighth, ten to the seventh or ten to the eighth.

Negative, negative seventh or negative eighth.

So we may have to come up with something smaller than that if Bitcoin continues to sort of rise.

Durable.

You'd have to go a long way from here.

Totally.

Durability.

I mean, Bitcoin is like way, way more durable than U.S. dollars.

Like we rotate dollars out of the system every once in a while because they just get too ratty.

And like that's your Bitcoins are not going to degrade on a hard driver and cold storage somewhere.

So there's this interesting you know, basically in everything except for broadly accepted Bitcoin sort of wins.

Now again that thing we talked about earlier, with the US dollar having this overwhelming, unbelievable head start on the network effect like TBD.

If Bitcoin can actually even though it's better in all these ways, can it actually fight that?

And I think an open question is does it need to, or can it sort of exist as a complement alongside TBD?

But there's three more features that Bitcoin has, that USD doesn't, which and again going back to Matt Huang here it is digital programmable.

There's actually four decentralized and censorship resistant and universal.

And I think that's where you start to get into this daydreaming about finally a currency for the internet.

Things like smart contracts, which you can do on a very limited basis with Bitcoin.

That it's digital first, where you're not saying I'm transferring you some money, but wink wink, it's on credit and I'll make good on it later.

You're literally instantly or within 30 minutes, moving money from one place, from one account to another.

The decentralized and censorship resistant, it's very interesting.

Five, 10 years ago, I would not have been a person that's like, oh, that's super important in money.

But I think everyone's confidence has been a little bit shaken by recent events and Like wow, it actually maybe I do want a hedge.

Like maybe I do want some amount of hedge in case.

And, to be clear, certainly recent events in the US, like the capital happening now, but also recent events in China and all over the world.

Like it's hard to think of maybe except New Zealand.

I think New Zealand's doing on the rise, but it's hard to think of other governments where, like trust isn't going down around the world right now.

That's true.

I skipped over it in History and Facts, but...

A huge moment for Bitcoin was in 2013, when Cyprus went bankrupt and defaulted and nationalized parts of like bank accounts of citizens.

So like, let's get this clear.

Here's what happened in Cyprus. if you held over the equivalent of like $100,000 in a bank account in Cyprus, when the Cyprus government defaulted, they reached into your bank accounts, like I was saying in my nightmare scenario when paying my taxes, and they just took all your money over $100,000.

They just nationalized it.

Holy crap.

And that happens in the world.

And so like a bunch of those people like and around the world were like holy crap.

Like I see now why I want Bitcoin.

Yeah, that's wild.

So that's sort of how I wanted to go about.

You know, in this comparison that we often make and what would have happened otherwise.

This is sort of my Bitcoin to USD comparison.

And that might not be fair.

Like I think, as we move forward here and David, you have a little bit more context here than I do the right comparison may actually be to gold, not to USD.

And at least at this point in Bitcoin's development, it might be less about can I use it at retail opportunities and more about hey, can I at least count on it being a good store of value?

Yeah.

I mean, that's the thing.

I think, well, we'll get into this in grading and how it's performed across different dimensions.

But I think most people, certainly all the institutions that are coming into Bitcoin right now, They're not thinking about it as versus USD.

It's not an or, it's an and.

This is a good store of value.

I'm worried about inflation in USD and other relatively secure assets.

Now, Bitcoin has tons of volatility, but it's got upside and it's not going to experience inflation.

Great.

I'm going to view it like I view gold.

And by the way, did you know gold's money supply increases?

I think it's like from finding new gold every year, but like it's a one and a half percent.

Like it's literally from mining.

You know, they're adding to the gold money supply.

Obviously not at the whim and in such great volume as USD is.

But one thing that Bitcoin proponents would espouse is that already, even with you know, we're only 12 years into this, or 10 9, 11 years into this.

Already, the money supply increases by less per year than gold does.

Oh, interesting.

I didn't see that.

It's like 1-ish percent versus 1.5 or 6 percent.

All right.

What else in what would have happened otherwise?

I mean, we could talk about interesting things like what if Silk Road, what if DPR hadn't gotten arrested and it were still operating?

You know what if Coinbase and Gemini and the like hadn't been built and we were still all running on Mt?

Gox?

I don't know that those are that interesting.

Like I think those are.

You know, they're kind of like any company story we tell where like takes a lot of luck along the way.

You got to get the lucky breaks to keep going.

And Bitcoin certainly had that.

Why don't we move on to on the playbook?

Because I think I think actually a lot of those for me feed into one of my big playbook themes.

Cool.

Well, my biggest one was definitely this notion of bubbles as a go-to-market strategy.

My second biggest one is again.

I'm just so entranced by the beauty and simplicity of reading the white paper.

There's something rare that happened in Bitcoin that I don't think happens often, which is that just a small set of very clever, very simple inventions working together unlocking a tremendous amount of new value.

And they built on shoulders of giants past like public key encryption and one-way functions, and certainly the proof of work from Hashcash and other people that had come before.

But I mean, the notion of a blockchain incorporating elements of the things that came before in sort of a tight and near perfect system is really a marvel.

Like, no matter how you feel about Bitcoin and everything that's happened because of it, it is a beautiful system.

It is.

I mean, we were talking about this before we started recording.

My first reaction in rereading the white paper for this was was like there's got to be more, like there's got it's only nine pages.

Like i was like oh well, there's got to be a bunch of stuff that they're not describing that like other little like things and hacks and stuff you need to do to make this work.

And like what about this case?

What about that case?

And then, but then you think about there is, with like increasing the block size and like the these forks that have happened.

There was forks yeah, all this stuff, but like So small, like so relatively few things.

Like you probably count, on one hand, the number of like additional modifications to the system that have had to be made over the last 10 years that weren't captured in this nine page document.

It's incredible.

Yeah, it is.

I think the biggest change that Satoshi did not foresee that will need to happen is the one that's going on now and the one that hasn't really been implemented yet, where Bitcoin was initially kind of created to replace the payments layer on the internet, first and foremost, and create a low transaction cost payment system with no fraud.

And as, as you sort of dive deeper and deeper and deeper it, you realize it's actually not great at that right like what it is in it in its current form, because there's so many people who want to use it, it's it's kind of like, it's kind of existing at a different level of the stack, like if you look at the like money stack, there's kind of like well, like there is the US dollar.

And then on top of that, there's like the Federal Reserve.

And on top of that, there's like the central banking system.

And then like there's your account at the bank.

And then there's like, you know, credit cards and stuff.

And like it's actually not a great credit card but it is a pretty good either bank account or, like one level deeper, where it's like the rails that, like the central banks, all work on together.

And I think, like what we're seeing is that And this is where I think there's going to be a lot of debate within the community.

And I've only dipped my toe in to really understand this, but it's very clear that, like the blockchain, the Bitcoin blockchain as it exists today is going to be for like moving large amounts of secure value around infrequently and frequently.

What needs to be built is still sort of like Bitcoin's credit card.

Exactly.

That's so funny.

I was thinking the exact same thing over the past couple of weeks researching, which even though with how we started the episode, like you said, the original goal was like make native money for the internet and fix payment rails and whatnot.

Like, Yep.

This is not... The realization to me was like, yeah, Bitcoin is like the bank.

It's like the central bank plus like your bank.

It's not going to be good as a credit card.

And that's okay.

Because other internet native systems can be the credit card on top of it, stuff based on, you know d5, projects based on ether and the like.

Well then, we'll cover all this on another time on acquired.

But like that's okay if the the credit card, like the rapid transaction layer in internet native crypto currencies, is different than the bank account layer yeah, like one.

You don't need one ring to rule them all here, Yep.

That's a great point.

As long as you can port in and out.

Just like you know, when I pay my taxes, I pay them out of my bank account.

But when I buy something at the, you know, at the store, I go hopefully someday again out to eat at a restaurant or I order on DoorDash.

I pay with a credit card.

That's totally fine.

I'll do stuff with an Ethereum based, you know, DeFi project for rapid transactions and I'll move money in and out of that as needed from a Bitcoin wallet. one thing that I've been increasingly thinking about as we've done these episodes, uh, is, is trying to factor in more of my why now to our playbook.

Like why did this happen when it is happening?

And, uh, for Bitcoin, I want to talk about this idea that Nick Szabo brought up.

Um, he and Naval were on an episode of the Tim Ferriss podcast that, that, uh, will include in the, the sources here.

And, um, I haven't been able to shake this idea from my head.

So we've been obsessed with making computing more efficient over the last several decades.

And frankly, we've needed to, because we could clearly come up with reasons why we needed more compute than we had.

The use cases definitely outpaced what the hardware was capable of.

And Bitcoin is one of the first times that we deliberately want to, and have done, something that is computationally extremely inefficient.

And, when you think about it, Bitcoin requires tons of computers to do the same slow actions, to check each other's work, to propagate this blockchain all over the globe over and, over and over again by, like it's, the many computers doing the same work, because they're sort of voting by doing the work, which will have environmental consequences that we're going to talk about just before grading.

So it's expensive from a computing resources perspective.

But if it really does unlock new value for humanity, you can think of it as like a clever way to take advantage of the orders of magnitude more compute power that we have now to do something that is potentially a fundamental breakthrough for humanity.

And it's interesting to try and apply this lens and think, well, what else could you accomplish that was previously thought to be impossible from a system perspective by leveraging this incredible scale of computing in a very inefficient way, where we're basically like... I think the way that Naval put it was like, our brains haven't become any better computers, but we've developed way better computers.

So how can we take like, take things that our brain currently, you know, or hasn't been able to do for all these millennia, and figure out a different way for the computers to take on the work, not in a super efficient way, but in a system-wide new use case way?

So, like it's a little out there, but i i think that's a lot of like ethereum.

We'll talk about that when we do someday put the pin in that.

Put the pin in that for sure.

All right David, I have one more, but you go first.

Okay, cool.

I had one big, well, I had two playbook themes that I want to highlight.

One, I want to be not careful here, but specific.

I think this whole story really illustrates for me when you are pursuing a network effect, a network economy based power business, you know like this is like Facebook, is like most social networks, right?

And the like, like Airbnb, two-sided network effect.

In the beginning, what matters is getting nodes and usage on the network to start.

And so it matters less what they are doing and more just that people come on board and that your value grows, according to Metcalfe's law.

And then as it grows, more sets of users and use cases will come on board and it will evolve.

And so like in Bitcoin's case, this is why I said I want to be not careful, but specific.

I am not in any way condoning what happened with Silk Road, or that that's OK, or that that should happen, or anything.

But just from the perspective of value building of the network, the fact that it happened is like transactions needed to start happening.

Nodes needed to come on the network for users and for miners.

And Silk Road provided that as the bootstrap, the first use case.

And then there were more after that.

And one thing led to another.

And now here we are.

Here we are is so radically different than what Silk Road was.

But for the underlying network and the protocol, it doesn't really matter.

What matters is increasing your velocity and growth of users and transactions.

And so then I look at Facebook, when I look at Airbnb, it's actually the same story.

Like what was Facebook in the early days, as we've alluded to, it was like undergraduates at colleges looking for attractive photos of you know other incoming undergraduates at their colleges, right.

Like that is so different from Instagram and WhatsApp today.

Right.

That's OK.

Like that's similarly with Airbnb.

Like what was Airbnb in the early days?

It was like people sleeping on air mattresses in each other's apartments.

Yeah.

What is it today?

It's something wholly different.

But the point is growing the network.

It's funny, like on the one hand, yes, you are totally right.

On the other hand, I'm like sitting here thinking and this is not really advice.

It's just an observation.

And before that I'm just going to do a bunch of random crap, but people are totally going to use it a lot.

And eventually once they're all using it, then I'm going to make them do this other thing.

I'm going to be like, no, like that's extremely unlikely.

Yeah.

Well, I do think there's some applicability here.

Yeah, totally.

It's not totally apples and oranges.

You stair-step up.

I think Ben Thompson had an old article about this with Snap and laddering.

You ladder up from disappearing text messages to a broader social network.

And so I do think you can be very strategic about this.

I think it also matters for investors who, when you see something like this, that's a network effect.

It's so easy to write off Bitcoin because of Silk Road.

But if you step back for a minute and you're like wait a minute, is there a chance that this is just the first set of applications on this network?

Is there a chance that people sleeping on air mattresses in each other's apartments is just the first set of you know use cases on this network and that that'll bring in and attract the next set?

Yeah, fascinating point.

And then the second theme I wanted to highlight, which is smaller and also sort of tarnished just because of the ICO thing, but is, I think, brilliant and new about crypto and new crypto projects is if you can reward and incentivize usage of your system by value within the system itself, like with the mining setup of like, the rewards for mining are Bitcoin.

Bitcoin is the work done by mining, right?

That's super, super powerful.

Like now there's an incentive in and of itself for people to come in and use your network.

Now is a great time to thank good friend of the show, ServiceNow.

We have talked to listeners about ServiceNow's amazing origin story and how they've been one of the best performing companies the last decade.

But we've gotten some questions from listeners about what ServiceNow actually does.

So today we are going to answer that question.

Well, to start, a phrase that has been used often here recently in the press is that ServiceNow is the quote-unquote AI operating system for the enterprise.

But to make that more concrete, ServiceNow started 22 years ago focused simply on automation.

They turned physical paperwork into software workflows, initially for the IT department within enterprises.

That was it.

And over time, they built on this platform going to more powerful and complex tasks.

They were expanding from serving just IT to other departments like HR finance, customer service, field operations and more.

And in the process, over the last two decades, ServiceNow has laid all the tedious groundwork necessary to connect every corner of the enterprise and enable automation to happen.

So when AI arrived, well, AI kind of just by definition is massively sophisticated task automation.

And who had already built the platform and the connective tissue within enterprises to enable that automation.

ServiceNow.

So to answer the question, what does ServiceNow do today?

We mean it when they say they connect and power every department.

IT and HR use it to manage people, devices, software licenses across the company.

Customer service uses ServiceNow for things like detecting payment failures and routing to the right team or process internally to solve it.

Or the supply chain org uses it for capacity planning, integrating with data and plans from other departments to ensure that everybody's on the same page.

No more swivel-chairing between apps to enter the same data multiple times in different places.

And just recently ServiceNow launched AI agents so that anyone working in any job can spin up an AI agent to handle the tedious stuff.

Freeing up humans for bigger picture work.

ServiceNow was named to Fortune's World's Most Admired Companies list last year and Fast Company's Best Workplace for Innovators last year.

And it's because of this vision.

If you want to take advantage of the scale and speed of ServiceNow in every corner of your business, go to servicenowcom slash acquired and just tell them that Ben and David sent you.

Thanks, ServiceNow.

All right.

Well David, if there ever was an episode that we need to discuss the difference between value creation and value capture, it is this one.

This is normally a two-part section.

I'm going to ignore the one about do they capture enough of the value that they create?

Because I think we'll leave that to sort of listeners to ponder on, based on everything we've already talked about in this episode.

And of course, we've already talked about all the sort of illicit uses of Bitcoin.

Again, I'll leave that to further ponderance by the listeners.

But I want to talk about the scale of the environmental impact because I surveyed some friends like what do you want to know about Bitcoin?

And one friend texted me and said, well, is it bad for the environment or no?

And it's a good question.

The answer is kind of like, well, relative to what?

Because sure, does it use computing power?

Absolutely.

Like how much and what do other things use?

So here's at least some estimation of an answer.

In 2019, MIT tried to answer this question by commissioning a study.

And they basically said that Bitcoin mining specifically accounts for about two tenths of a percent 02 percent of global electricity consumption worldwide.

And it produces about as much CO2 into our atmosphere as Kansas City does, as just like a ballpark, so like a whole city per year.

And some estimates actually put it even closer to 04.

So almost half a percent of the world's energy production.

So, on an absolute basis, for anybody who actually knows a lot of energy totally, who knows their climate, this means 23 megatons of CO2 are put out into the atmosphere per year because of Bitcoin, which that another comparison is between.

If Bitcoin were a country using energy, it would be right between Jordan and Sri Lanka in terms of their greenhouse gas pollution.

If you include the other cryptocurrencies, mostly Ethereum, that actually doubles.

Help you estimate how much energy is being used.

So I think the answer is a lot.

I think there's a.

There was other studies that have been done that shows that mostly their mining facilities are using renewable energy.

So it's not like it's necessarily consuming coal or oil.

Right.

Like the Central Basin in Washington.

Right.

That doesn't change.

I mean, it's still like that's a lot of energy, right?

Energy is fungible, not as fungible as money, but as fungible like money is.

So if, like these, data centers are using that renewable energy, then it means that other places are likely to look toward coal or to oil.

And so, yes, it's making an impact in our greenhouse emissions.

And that glorifying the system should not come without the discussion of, is it worth it?

And I think listeners, you make the call of whether you think that all this utility that this new monetary system has brought is it worth it if we race toward raising the global temperature by one or two degrees Celsius over the next 10 or 20 years.

I don't know.

And I think the jury's out.

I'm not sure there's really much we can do about it.

Again, it's a decentralized thing.

So what are you going to do?

Tell people.

Well, there's also a question.

I certainly haven't done the work to know.

I don't know if you have of how much energy does and emissions does the traditional finance system produce?

For sure.

It's also a lot.

I bet it's a lot more.

Yeah, yeah.

So here's an interesting stat on that.

A single bitcoin transaction now remember we talked about these.

These are really ideal for like, big secure transactions, not credit card transactions, but in some way there's a lot of smaller transactions that are being used for.

Today, a single bitcoin transaction consumes more energy than a hundred thousand visa transactions.

Ah, interesting.

I mean, if you think about all the computers that then have to go and verify that proof of work and stack it at the next level on the blockchain and propagate it out, it makes sense.

A centralized system is way more efficient from an energy consumption perspective.

Yeah.

That's a good point.

Then there's also, like I think, the other dimension to this question is not that we're going to be capable of, or choose to talk about a certain side here, but it's just the political side of this.

Like this is there's a probably a reason why currencies and governments have been tied together for uh like four or five hundred years.

This is separating that out like what's what's?

What are the consequences of that going to be?

They're large.

It's an unbundling of one of the major components of the services that a government provides in order to ensure a stable society.

And like, will societies that you currently think are stable stay as stable if they don't also have control over being the you know, if they don't own the fiat currency?

Yep, totally.

So that's a question.

Then there's stuff like the Cypriots in residents of Cyprus.

If those people had owned Bitcoin instead of had their deposits in a bank, wouldn't have been able to be nationalized.

Or if you live in a country where certain things are illegal that may or may not be right to be illegal, you can now have a vehicle to transact with them via Bitcoin that you couldn't otherwise use.

But yeah, there are also a lot of downsides too.

So thorny, thorny questions.

I think your point there was right though.

Like the cat is out of the bag here.

Like these are philosophical questions.

The real questions are going to be just like, what, how will history play out in the coming years?

Yeah.

And this decoupling from government is interesting because for the average person it is way way way, way better to live in a stable society versus an unstable society.

Government provides an enormous amount of value in our lives, ensuring you at least know what system you're operating within.

So you generally don't have concerns about safety or about someone's screwing you over in one way or another or you know, just provides like reasonable guardrails so that you can do higher level functions in life and like if you wanted.

The flip side of that is with stability comes sameness.

So if you're part of a group that's been oppressed by a government Maybe that's been the case for hundreds of years in your country then you're going to keep being oppressed systemically.

It would be better if you lived in a more dynamic nation where you could do more things to break the system and rise up and get power.

But I think these are sort of two sides of the same coin.

And if you see government owning less and less of the sort of core components of a society, the first of them being money, you will both see the destabilization, which is worse for the person who benefits from the stability, but also you will see greater opportunity for those who are oppressed to be unoppressed.

One last thing that actually is worth calling out here on a separate topic, is This is we're going to talk about this in creating in a minute?

This is probably the best.

If you were to categorize Bitcoin, look at it through the lens of like an acquired, lens of like a venture investment.

This is probably the best venture investment of all time.

Like a 3 million X, like what?

There's nothing that's even close.

Like this is just, just like hands down.

Okay.

Every other investment like that, probably in history, has just solely been the realm of institutions, right.

Like you could found a company, you could be Mark Zuckerberg or you could be Excel and founders fund that invested in the early rounds right.

And as an institution, like you and I couldn't do that.

Bitcoin, anybody can participate in this.

Yeah.

And, in fact, the institutions have been locked out until now because the scale wasn't big enough for them to participate.

Yeah.

Put another way, asymmetric upside opportunities are typically only available to frankly wealthy people like venture capitalists, those who invest in venture capital funds, accredited investors, people who are able to get in early on these companies that could be the next Amazon.

And very rarely is there a public company that has that kind of upside left in it.

Of course, Amazon is the example where there actually was that much upside left in it.

People are perceiving that to be the case with Tesla.

But I think the point you're making is that like, oh my gosh, look at this.

This was a retail investment available to consumers at any scale and proved to have this type of asymmetric upside.

Yeah.

And when I say asymmetric upside, I mean like sure you're going to invest in a stock and oh my God if that stock 10Xs, that would be amazing.

But almost never are you going to buy a stock and it's going to 1000X the way that Sequoia did with Airbnb.

And I don't know.

I have the number off the top of my head but you know, in that sort of order of magnitude.

Yeah.

So I think that's like interesting.

For sure.

Value creative for those who did so in the pre-2013 era.

Yeah.

All right.

Grading.

All right.

David, how on earth are we going to grade this one?

Oh boy.

Okay.

Well, I think we already unless you disagree Ben, I think we knocked out number one, which is like how would you grade an investment in Bitcoin?

Like this is...

It's by far the greatest investment opportunity of all time in humanity.

Over the past 10 years, for sure.

Okay, that's easy.

That's not that interesting.

There's.

How would you grade Bitcoin in its sort of original purpose, as laid out in the white paper, of becoming a native internet currency medium for transaction for the internet?

I think the grade is actually pretty poor here relative to the initial intentions.

Now, that said, it could prove with the 20-year lens let's say we're sitting here in what would that be?

2028 from the white paper's initial beginning of the authoring that it actually works really well if they can figure out this other layers of Bitcoin and how they sort of interact and how you can do much more higher velocity, lower value transactions in a cheap way.

Like it may be the case that it ends up great, but like so far, no, it's been pretty poor for that.

And Bitcoin itself.

Now, I think very likely no, if there's no Bitcoin there, you know, there wouldn't have been any Ethereum and Ethereum and it's, derivatives probably in my view right now stand the best chance of like building that layer so maybe it's responsible but like bitcoin itself no and probably never gonna be right i can check out on overstock.com but that's a like it's kind of about it yeah interestingly so stripe supported bitcoin for a while but then once it became clear that like this it was too slow and too unwieldy and transaction costs were too high for high velocity transactions they dropped it uh in 2018 they stopped supporting it interesting well that that's that's definitive like it's it's a d or an f for yeah for its initial purpose so far but did it stimulate innovation in that area Yep.

Okay.

Next.

Oh, I was gonna say we do store of value next.

That's probably related to being an investment.

I mean, it's been an amazing investment in a highly volatile store of value, right?

So it's not a it just like anything here, like investing in value depends on your timeframe.

Like, If you have a multi-year timeframe, amazing.

Best investment of all time.

If you need this to function as something like a US dollar where, like hey, I need to pay my taxes next quarter.

I want to make sure that I put this money away so that I know I'm going to have that money to pay my taxes next quarter.

Not good.

Yeah.

Yeah, it's interesting.

To me, from a store of value perspective, it's a great hedge.

There still is a reasonable possibility that it loses 60 70, 80 of its value in a short period of time.

So like, am I calling my parents and telling them you should put your retirement in there?

Like, absolutely not.

Should you be building it into your portfolio?

Maybe.

Like, again, gold continues to probably be the best comp.

It's like gold with a bunch of upside feels like... And with way higher volatility there.

If you put money into gold, I'm probably going to be able to pay my taxes next quarter by converting that back out.

That's a fair point.

Yeah, it's super high volatility gold.

And again, has...

I don't know that it's like, I don't know that there's alpha there.

Like there's just as much upside as there is downside.

Yep, yep.

But I do think, you know, over the long arc, there's a lot of upside, very likely.

And especially and we'll get into our last grading lens here especially compared to cash which, in a zero interest rate environment plus an inflationary environment where you are losing money in the long term.

Not to mention dilutive from the money supply increasing this much.

You will...

Unless something drastically drastically changes, you will assuredly lose purchasing power by keeping money in cash over any extended period for the foreseeable future.

Bitcoin knocks it out of the park relative to that.

Yeah, that's a great point.

High volatility relative to that cash, but yeah.

Yeah, it's a really good point that the old aphorism of like I'm going to keep cash around in case there's a recession and I have the opportunity to buy up.

Like that, cash is just losing value faster than it ever has.

We're not in a hyperinflationary environment but relative to where we normally are, you certainly can't put it to work in a great way without taking meaningful risk.

Now I will say we don't have the lived context of the 80s in America, where interest rates were in the teens.

Talk about inflation, that's insane.

You're losing 15% purchasing power every year.

That's crazy.

So we don't have that context of lived experience.

But it's just like.

There's just no rational way that I can think of to look at why in like long term holdings, that I don't need this cash right now and I can afford to be long term focused with it.

I should have it in cash.

That just seems like there's no way to win there.

Well, the last way I want to sort of analyze this is through the venture investment lens of.

Is there still enormous upside in this investment?

And I was kind of thinking about this like so we saw a 35000x in the first five years and then we saw an 85x in the five years after that.

And even to get a 20x in the future.

That means a single Bitcoin would have to be valued at over half a million dollars.

But which the Winklevoss twins are on record saying that that's their essentially price target for Bitcoin is 500k, which would be parity market cap with the above ground gold.

Like if Bitcoin had the same market cap?

As right, that's what I was gonna?

Yeah, that's where I was gonna go.

Here is like it's sort of silly to like think about.

Like what could I imagine a Bitcoin being?

Because you can't, it's arbitrary.

The interesting thing is, if I owned the share that I would own of all the Bitcoin in the world which you can calculate, and Bitcoin's market cap was like this is what I'm saying.

I'm analyzing like a venture investment, do I think this thing has a chance of sort of being a 20x here?

And the answer is probably.

I probably think that.

Or the answer is yes, I do think that.

Because if it's got this half a trillion dollar market cap today and the market cap of what people are doing with similar products like the US dollar is there's 20 billion of those.

There's $70 billion worth of that globally globally.

You know, there's five ish billion dollars of gold and that's its sort of closest comp.

Like, do I at least think it can get steal more of the gold market?

Yeah, totally.

And that gold market is even without jewelry, 10, 10 times bigger than its current market cap.

So do I think it has a 20 X in it?

It could.

It has the possibility of that.

And in a venture return, you're never underwriting to, yeah, I think this is going to happen.

You're underwriting to, if it happened, would it be sufficiently large enough?

And am I willing to put together a portfolio of those if it happens?

And just make sure that all of them clear the hurdle of if the one or two that are enormously successful are successful, will it be big enough in order to make the whole portfolio worth it?

And Yes, I do think this has enough running room in front of it.

All right, let's I'm going to bring it full circle for acquired here.

The pre 2011 era for Bitcoin was science project phase.

The 2011 to 2013 era was like seed investment phase for Bitcoin.

You invest in Bitcoin during that phase.

It's like being a seed investor in Google or Facebook or whatnot.

The 2013 to 2017 period was the Series A, Series B stage investment.

You go later in that spectrum.

You're like Greylock coming in and doing the Series A of Airbnb at a 60 million post.

Super high at the time.

That seems crazy.

Well, yeah, they made a lot of money there.

We are now in the growth round phase of Bitcoin.

Oh, you don't think we're in the post-public?

No, no, no.

No, because there's still all this upside.

Like, you're investing in a growth stage company, right?

Like you're doing a Series C in, you're investing in stripe right now, like that's actually the reasonable comp is like oh no, i don't think we're there yet.

2020 stripe well, i so.

So here's why you're in 2017 stripe, here's why i think you were in 2020 stripe because bitcoin, after it in our little playground here, would go public.

It still has, like the, because the tam is so big.

It's amazon like in that way, where it still has a ton, a ton, a ton of growth potential in front of it after it's sort of mainstream and accepted by all the people that would be interested in buying a robust IPO.

And also, it's not a company.

It's way bigger than that.

Yeah, yeah, yeah.

I guess that's sort of where I would take your analogy.

This is so great.

I think we're viewing it the same way, but we're going to disagree on what stage.

I think it's Stripe in 2017 because I think this is like a Series C-ish in a company.

The path that you laid out of the path to gold, high execution risk, whatnot, but that's the...

That's the upside.

Like it, it accomplishes that great.

I think that's the IPO.

It's gold with more utility.

So like it's hard to imagine why they would be able to pull that off.

But here's the Amazon.

What the case?

You, I think in my mind uh, and we can disagree about where we are in this, there's still upside to gold.

Like it may be low likelihood, but it's like Amazon went public.

It was a bookseller.

Amazon today is AWS and Amazon, right?

Like the upside is, it becomes more than gold and starts to eat into reserve currency.

You know, et cetera, et cetera.

So I think that's, I think there's still another after booster stage on this.

Whether it'll happen or not, I don't know, but I think you could view two tiers of upside left here.

One is realize the gold thesis.

Two is expand beyond gold.

Well, because realizing the gold thesis is only another 10x.

Right.

Yeah.

It's like a 15x.

Well, I'm not counting... I'm not counting the part of gold that's dedicated to jewelry.

Oh, got it.

Yeah.

People holding gold as a store of value.

Although jewelry is a store of value too.

It's just inflated because it's prettier.

All right.

I really like that analysis.

I think that's a great place to leave it.

I haven't checked the time.

I have to imagine this is going to be the longest acquired episode in history.

So... listeners thank you for going on this journey with us you know david i didn't expect uh frankly us to do as much as we did looking both at the history and sort of this like strategy pull apart and some of the technical aspects so uh i hope listeners you enjoyed all three uh we'd love feedback particularly if you are um an economist or in this ecosystem um Or if you know about moves that have been made in this ecosystem that we don't know about yet, I think we like to continue learning in public.

So please, please, please reach out.

Well, for folks who don't know, we have started codifying the playbook from each episode in some written bullet points.

We did that for this episode as well.

And we email those out after posting each episode.

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We'll see you next time.

[The Rise and Evolution of Bitcoin: A Strategic Deep Dive]-[Bitcoin]

📋 Summary

The Bitcoin Odyssey: From Internet Curiosity to Global Asset

The Fundamental Problem: Why Bitcoin?

Key Strategic Pillars

1. Network Economies as a Go-to-Market Strategy

2. Counter-Positioning vs. Fiat Currency

3. Computational Inefficiency as a Feature

The Evolution of the Ecosystem

Critical Analysis and Environmental Impact

Conclusion: The Future of the Asset

🎯Key Sentences

📝Key Phrases

📖 Transcript

[The Rise and Evolution of Bitcoin: A Strategic Deep Dive]-[Bitcoin]

📋 Summary

The Bitcoin Odyssey: From Internet Curiosity to Global Asset

The Fundamental Problem: Why Bitcoin?

Key Strategic Pillars

1. Network Economies as a Go-to-Market Strategy

2. Counter-Positioning vs. Fiat Currency

3. Computational Inefficiency as a Feature

The Evolution of the Ecosystem

Critical Analysis and Environmental Impact

Conclusion: The Future of the Asset

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🎯Key Sentences

📝Key Phrases

📖 Transcript

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