Acquired - Bitcoin

Episode Date: January 19, 2021

We had to do it. After 12 years and 3,000,000x appreciation, we kick off Season 8 with the best investment of all-time and our biggest episode ever: Bitcoin. From the first bitcoin transaction of 10k for two Papa John's pizzas (worth about $350m today!!) to $40k+ BTC and maybe the moon beyond, we cover the whole crazy, improbable journey of how a single 8-page PDF document changed the world of money — and perhaps the world itself — forever. Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!The Bitcoin Playbook is available on our website at https://www.acquired.fm/episodes/bitcoinLinks:Satoshi's Whitepaper: https://www.bitcoin.com/bitcoin.pdfMatt Huang's "Bitcoin for the Open-Minded Skeptic": https://www.paradigm.xyz/Bitcoin_For_The_Open_Minded_Skeptic.pdfNellie Bowles's "Everyone Is Getting Hilariously Rich and You’re Not":  https://www.nytimes.com/2018/01/13/style/bitcoin-millionaires.htmlSquare’s $50m investment in BTC:  https://images.ctfassets.net/2d5q1td6cyxq/5sXNrlEh2mEnTvvhgtYOm2/737bcfdc15e2a1c3cbd9b9451710ce54/Square_Inc._Bitcoin_Investment_Whitepaper.pdfEpisode Sources: Full list of episode sources available here:  https://docs.google.com/document/d/16QCDNm2qzG3Bn5h1j1KXisxL_JGT7egDx7czX9ThHLY/edit?usp=sharing 

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. After close to 150 episodes over the last five and a half years, this will be the first one covering something that is not a company.

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. 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 $30,000, a 3 million X investment return.

That's just mind blowing. I was gonna say, David, I don't know totally for sure that it's the single greatest, you know, decade investment return in human history, but it kind of has to be. I just can't. I was even thinking, I was looking at, so there's the NASPERS investment in Tencent and the SoftBank and Yahoo investment in Alibaba. 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 yep pretty crazy i have not computed the irr but i bet that's pretty good too yeah 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 and you want to be a deeper part of what David and I do here, you should become an Acquired Limited Partner. You'll get access to our library of over 50 interviews and deep dives on company building topics, our monthly Zoom calls, and this is new, live access to listen in while we record big events like emergency pods, like the Slack one we did last month, a couple months ago. Yeah, so great. And it feels like 10 years ago. 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. It is so clear to David and I that we truly do have the greatest audience in the world, from young people just starting out their careers to CEOs and top executives, some of which are running $100 billion companies and general partners at venture and investment firms of every size around the world. 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 acquired.fm slash LP, and we can't wait to see you there. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business.

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by clicking the link in the show notes or going to servicenow.com slash AI dash agents. 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. Hottled Bitcoin. Hottled 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, 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 two days ago on Monday, January 11th, 2021, when I paid my taxes to the US government. You know, I never really thought about it as you know, 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, you know, pay the taxes. But this time I found it very, very concerning. Like I was, I was, I mean. 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? 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 onto 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 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 take out many thousand dollars from my account. 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. I didn't 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. If they could do that, I mean, the routing number is just the branch. So 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. I actually give it to a lot of people. And the more time we spend on the internet and transact and we build acquired, 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 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 like probably three or four times over the past 10 years. Yeah, something like that. Some of that. I'm sure everybody listening is probably in the same bucket. Like once if somebody knows your credit card number, and you don't even have to like, 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. Like 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. No one will guess that. Well, they are hard to guess. And of course, you know, 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. But this is a huge tax on the system. So in 2018, there was $28 billion of credit card fraud in the US. Plus, there are estimates there are another $50 to $60 billion in financial bank fraud, wire fraud, 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, they're charged 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? Like, it's kind of crazy. So like, 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 as 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 going to 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. 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 or gold or seashells or whatever. 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 notes basically just say like, 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. Yep. 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'll 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 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 of 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 banknotes, 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 a diner's club was one of the first. And then I didn't realize this till, 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 consumer debt. Also, an enormous consumer CFPB problem in our country today, the Consumer Financial Protection Bureau, that this has been wildly abused. And 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. 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, how you could have these instant payments even before we had a debit system. Yep. Well, there's one other problem, though, with the credit system, which is for merchants, it's good in that they get to accept easy payments from lots of customers. They can probably do higher dollar value transactions without checks. 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 if you're a merchant, you're taking credit cards. Not only do you have to pay a fee to the credit card companies. 2.9% plus 30 cents. Plus 30 cents, right. But also you just don't get the money right away because it's all 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 that's Visa or MasterCard or American Express and the like. Because, yeah, there's some good things here, but 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 had to call up the issuing banks of the cards. There wasn't the automatic 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, OK, 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 still is pretty slow. I think it's basically, 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 and 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. It's just there's a lot more volume in the system than there used to be. And famously, 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,

companies, Stripe and companies like Stripe, you just have, 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 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, you know, 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 like that you've probably never heard of like digicash which was a company i think started in like 1996 e-gold was one of them bit gold was one which got pretty close and then actually in china this this is really interesting tencent had qq coins which were part of the qq network the the pre-wechat part ofcent. 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 of 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-indative 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. So they... 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 okay.

So like it was the rails were better for the Internet, but they still had this problem that it wasn't very efficient. 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 the, ultimately it was just a digital version of the same model of the traditional finance and banking system. Okay.

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 really, in this case, I think it's two things. It is, of course, the financial crisis. It's Lehman going bankrupt and massive, not only loss of trust in traditional banking systems, but also just financial hardship and ruin for so many people that caused them to go want to seek other opportunities. In addition to just this massive, exponentially growing complexity of payments on the internet that is like a whack-a-mole that people are trying to stay 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. 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, 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 like, you've got UDP, and you've got SMTP to send email, and you've got all these protocols that like, people have sort of stitched together. And then, of course, you've a browser that sits on top of it all. And there's the worldwide web that sits on top of HTTP. So there's like 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 bitcoin.org. Okay, nobody really notices this happening. Then on September 15, 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 31, on Halloween, so like six weeks after Lehman going bankrupt, a account with the name of Satoshi Nakamoto publishes a paper on the cryptography mailing list, metsdao.org, 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, you know, 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 white paper starts. Commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent

weaknesses of the trust-based model. 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 are putting too much faith in governments. None of that is actually in the paper. All of that is sort of 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, people think it 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. So this idea, the crazy underpinning of the traditional financial system that like there's one account number and if you know that account number which you have to give out to people to transact you're compromised uh that that had been fixed through email and other technologies on the internet encryption was the

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 like ciphers from you know pre-world war one era in war like you would have the same key to encrypt and decrypt and you know that 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. I don't want to be, I don't want you to be able to send me a hundred dollars, but then also copy someone else on that a hundred dollars 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. 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, 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. 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, 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. I take that Bitcoin, which is a hash that has all the other signatures that came before it 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's 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? Right. 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. And 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 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. Not only if you could do this, not only would you have to broadcast it out to a material part of the network and like 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 first place, which is go through a block and, you know, basically find the new block. 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. Like 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, you know, 100,000 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 like only a handful of other crappy laptops doing this, you know, 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, you know, where we are now, 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. And 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. And so 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 going to have to do some kind of charge back. 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 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 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. So if you mined 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. And it uses sort of a halving function so that 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. Like 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. 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 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 minute and say the implication here is that it's very easy to check someone's work when they tell you they have the answer to 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, can the reader say what two numbers multiplied together will produce the number 8,616,460,799? I think it will be quite unlikely

that anyone but myself will ever know. So he sort of came on to this, 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, this problem is never undoable.

There's a scary thing that exists here, which is at some point, 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 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 like, 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. 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 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 the notion of transmitting messages in a more secure way on the battlefield. The very same idea was discovered kind of 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. And 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 mass 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 in fact many people tried right like all these altcoins were you know forks of the

bitcoin source code to my favorite little tweak on this and dogecoin and you know thousands and thousands of people have tried to create alternate cryptocurrencies with varying levels of success yep totally uh and some of them are quite valuable um 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 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. But Satoshi Nakamoto, pseudonymous or not, not only publishes the paper, but then, of course, writes the first actual working implementation in code. 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 of 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 CypherFunk's email list?

Yes. So Hal was a CypherFunk. 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, it gets mined on Satoshi's mining rig. And for the next year, that's kind of how things go until May 22nd, 2010, the infamous pizza day, when one of the researchers working on the project, a Florida programmer named Laszlo Heinjic, I think that's how you pronounce it. 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 10,000 Bitcoins in exchange for anybody out there on the mailing list who wants to buy him a pizza.

I love this. So programmary. 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 with Bitcoin.

This approximately values Bitcoin at 0.25 cents per Bitcoin. Yeah, 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 taken me forever to mine these blocks. Great. Yeah. Amazing. I just also like Papa John's. That's the first, you know, Shaq is on their board of directors. He should be proud. Great. Yeah. Amazing. I just also look 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, stops contributing to the projects. He transfers

control of the open source repositories to some of the other developers on the project. He basically washes his hands and says, I'm done. Except at this point, he has somewhere between 600,000 and a million Bitcoins that he's mined as the first miner on the system. 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 like moved on. He actually communicates with somebody, asks him what's going on. And he says in a 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. Like most of the time, these people slip up in some capacity, like 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. Well, and I think this is also one of 10 people who people think it is, or it could be none of those people. We have no idea. 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 we propose this following solution. on BitcoinTalk.org named Smoke Too Much. That's Smoke T-O-O-M-U-C-H offers to auction 10,000 Bitcoins for $50. So it's like $25 for the Papa John's. He wants, you know, 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 beginning of 2011 to 30 cents per Bitcoin by whatever metrics people are sort of using, which is already a 120 and 20 X return on the Papa John's deal. No, even more than that, because the Papa John's was a fraction of a cent, right? And this is what now? 30 cents, 30 cents.

Yeah. So 120 X, like 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 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 five dollars and 27 cents per bitcoin which is crazy like who out there is going to be who's going to

be using 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 the Silk Road and what was going on. And 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. Like it couldn't be the more perfect cocktail for selling drugs on the internet. Totally. And what's kind of amazing is like, it's, 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. It's illegal. It's mail fraud.

And so it's literally just like eBay. This is exactly how this is working. It's eBay for drugs. I guess I always assumed they had to, I just never really thought about like, how would you get it mailed to you? how would you write the goods yeah most of these people aren't in the same city it's happening all over the world right and um yeah so it was actually kind of crazy so this 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 but at the beginning i think they didn't want to get involved in the transactions themselves so oh yeah that that'll that'll legally protect you as long as you're not taking a vid yeah yeah

for sure for sure it's all good we're just a platform like we don't 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 and by the way there was a federal case opened almost immediately like like i think i know that the feds were following for two years putting the case together so like observing everything that's going on well and there was um i think it was chuck schumer there's a great story that like he was shown this

on a computer it was like totally flipped out was like the government needs to like, we need the FBI to crack down. I was like, of course. And so during this time, this amazing over 1.2 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 looking at, you know, attractive freshmen of the opposite sex on campus for, 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 150,000 unique buyers and almost 4,000 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, 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. 100%. This is what's so ironic. It's funny that I use the word integrity.

It's like the acts of the potentially the least, depending on what moral authority you want to claim, the acts of least integrity guaranteed the future integrity of this financial system. Incredible. You can't make this stuff up. So finally, in October 2013, 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. It's this little, like Glen Park is this beautiful little neighborhood in San

Francisco, total hidden gem. Nobody knows about it. 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 Glen Park and three FBI agents conduct a sting raid. Two of them pretend to be a couple, a romantic couple that are having an argument and they have like a loud argument to distract him in the library. And then so that he looks up away from his computer and then the other one comes in, 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, like 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 was 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, let's say. So he had kind of supposedly and he wasn't convicted on attempted murder charges but gotten more and more paranoid as he was operating this site with the pseudonym and thought that people were out to get him which obviously they were the fbi agents at least and uh 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 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 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 144,000 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 is, you know, US 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.

And Tim Draper, the venture capitalist, 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 onto 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 144,000 Bitcoin, but there was another about 70,000 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 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 70,000coins from ross uh 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 uh sort of it's the fault of bitcoin for having a wildly obscure system that makes this whole thing tick but you tick. But is it the pilot's fault when

it's hard to fly in a complicated airplane? That's the question here. So of course, you can sort of hack into Ross's computer, you can get his private key, and then you can use his private key to authorize sending that $20, $20 billion worth of Bitcoin over to your account. 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 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 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, you know, 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 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 dollars worth of bitcoin so you've got 20 of bitcoin are lost you've got what are uh 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 4 million Bitcoin that are actually trading hands 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 2% 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. Yep. 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 bitcointalk.org and be like, Hey, I want to buy some Bitcoin so I can buy some drugs. There's got to be an easier way for them to buy in to the system, so to speak. 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. 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, 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 Mount Gox? We go all the way back to 2006 when a developer named jeb mccaleb who was a big fan uh no no no no in the u.s okay was a big fan uh as am i as are many people of the then going online but physical card trading game, Magic the Gathering. He thought, gosh, these magic cards, they're super cool. Lots of people love playing. You can buy them on eBay and whatnot, but there should be just like later there would be Goat and Reverb and what they should be a vertical, specific website on the internet for going and buying and selling magic cards. Great. I'm just

going to code that up. Why don't we call it Magic the Gathering Online Exchange? M-T-G-O-X, Mt. Gox. So this was created by Jeb in 2006. I don't know if he was not very good at distribution or whatnot. Clearly, there's demand for this. Lots of people are trying to build this now for magic cards and Pokemon cards and other cards. But for whatever reason, Mt. Gox, in its initial iteration, didn't quite take off.

He had it up for about three months. Nobody really used it. He abandoned the site. 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 non-profit doing cross-border remittances. It's backed by Stripe. Stripe is invested in it. Prior to Stellar, but well after Mt.x he founded ripple and he was the founder and the cto of of ripple uh obviously of course another cryptocurrency with its own story how after the incredible tragedy that we're about to get into of mount gox was he credible enough to then lead to other cryptocurrency startups really 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. He, 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, and he realizes the need for, 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 how to do this and he's got the mount gox.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 gonna use that oh 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 it was repurposed into just a Bitcoin exchange. And so help me understand at this point in history, like 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 is an interested buyer, a guy named Mark Carpeles, who is a French programmer who was living in Japan at the time. Super interesting character. And he makes an offer to buy Mt. Gox from McCaleb, which he does in March of 2011. And the statement at the time, McCaleb makes a statement. He says, to really make Mt. Gox what it has the time, Michaela 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 Robin hood,

everything before that, uh, 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, 2,500 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 happened 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 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. Not to mention, you know, Silk Road and all this out there, like, definitely held Bitcoin back from becoming mainstream for at least a year. It's so funny in the whole like crossing the chasm framework like in some ways i am an early adopter but i'm not like gonna adopt something that is only being used in my perception for like 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 it had to be at least that mainstream yep same here that was i started hearing about it with silk road and mount 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 uh gets uh the sting operation happens at Silk Road goes down. Mount Gox finally starts its death spiral. So they crash 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, 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 at all from Mt. 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 to like, if you have your own like hardware wallet or something, like if you knew Private keys are lost. They're gone. I mean, almost a million. And then another 100,000 that was owned by Mount Gox itself. So that's 7% at the time of all the Bitcoins in circulation, just blown out of the sky when Mount Gox goes under. And just in client dollars, that's $22.5 billion of Bitcoin today that are just, they exist, but assuming that those people didn't download their private keys, like, and they just trusted MtGox to say, you keep my private key. Or maybe they couldn't even download the private keys, but basically like, 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 like a legitimate exchange that people are going to trust to use that we're going to

work with regulators uh that we're going to you know make sure that when people cash out a bitcoin they pay their taxes you know 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 a 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 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 the effectively it lives in our cloud on our servers and you log in with a username and password and you do to fa and all the stuff that you trust but like we have custody of of your money it's kind of like a bank. Or maybe more like a bank or like a brokerage firm like Charles Schwab. 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. And 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 cut up your, you know, print out your private keys, you're going to cut them up, store pieces of those keys in safe deposit boxes all over the world, you know, that kind of stuff. But the average user, you and me, 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, 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 something where 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, you know, millions of dollars in cash lining your jacket pockets. Like 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 ecosystem. 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, et cetera, 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 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. Oh, yes, I do. 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 they're 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. 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 going to take the money in Facebook stock. Oh, I didn't realize that. 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. 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 was 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 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. 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 custodian for regulated asset managers and banks that no other exchange at the time had. 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 an asset keeps growing with an insane amount of volatility, of course, which still continues to this day. Bubble after bubble after bubble and 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 $5.27 per Bitcoin. By the end of the year, it's at $13.30. 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. 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 a Bitcoin. This is now the beginning of 2017. What was this? Six years earlier, you could barely buy a pizza for 10,000 Bitcoin. Yeah, it's totally fascinating to think about. 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. So compounding math is funny that way, where if you can buy in at that incredibly low cost basis where they started at one cent or sub one cent, a lot of that sort of

multiple happens in those early years, well before it even hits $1,000 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 three million x on your first dollars you also want to get the 85x on a lot bigger base that you're putting in later yeah it's interesting i mean it's also it's it's just especially interesting it's it's a little bit of like as we'll get into the analysis later i think we'll 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 like 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. 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. 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 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. Anytime you're starting a new blockchain based project, you have a launch just like Satoshi mined 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. So everybody and their mother literally everybody and their mother has ico in 2017 it's like the of 2017 dj khaled has an ico paris hilton has an ico floyd mayweather has an ico like unclear what any of these projects i was gonna say what's yeah 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 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.

So, and who was pumping up these things? So, you know, Bitcoin starts the year at a thousand dollars. 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 huddle it just just becomes an internet meme like uh boom goes the dynamite or any other oh i haven't heard that in so long so good so like

there are a lot of people that have just made all this money seemingly overnight to themselves in bitcoin they're like okay cool these icos great we'll pump the money into the ICOs. So by May, when the brave ICO happens, price of Bitcoin has doubled to $2,000 by the prevailing exchange rates, USD. By September, it's $4,000. 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, $19,783.06 per Bitcoin. Unreal. $20,000 per Bitcoin. And so this is like, for the record, I was very much in the camp at that point being at that point, I was cashed out. I was like, I'm done with this mania. There's all 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, Yeah, 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. I huddled. All right. So catch us up this January, 2018, you know, we see this, this run-up to near 20 K 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 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. But underneath all of that, and I think this is what as the hype as the tide went out, and the hype cycle disappeared, and all of these scammers, thank God disappeared, and ICOs became, thank God, a thing of the past. 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. So in the background, all of this, you know, 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 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 a, 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 $13,000, $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 so I think that's what triggered a lot of selling 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, 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 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 to do that. But they're doing both. It's tax dollar allocations and the Fed is printing more money. And so they're putting dramatically more money into circulation, which one way to think about

this for... I spend a bunch of time trying to figure out 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% of capital in reserve. Reserve ratios. 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

getting zero and inflation's happening so you're getting less than zero well so what does that mean that put 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 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 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 cap. Okay. And so there's more and more legitimization of the asset class happening, more infrastructure being built up. And in the environment that we're in, which 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 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 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 the conditions created people rushing into cryptocurrencies and specifically Bitcoin, 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. So in May of 2020, Paul Tudor Jones, the famous investor who runs a, I think a 22, $23 billion hedge fund, he goes on CNBC and he says, Hey, I actually have between one and two percent of my fund's assets in Bitcoin. And at a twenty two billion dollar fund, that's two to four hundred million dollars worth of Bitcoin that investor money to 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

investment firm, they reveal that they have $250 million in Bitcoin. 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- Cash and cash equivalents. Like a cash, yeah, like 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. 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 fund. 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, 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. Right. And keep in mind only, only three ish billion of the 21 billion coins that ever will be, you know, so there's 21 million million total there's something like 16 million have been mined so far maybe a little bit more um i think but only three million of those are actually ones that are traded the rest are held long term lost whatever the silk road coins the mount gox coins the satoshi coins you know there's a whole swath of millions of coins that are just gone they can't trade then you've got all the coins like that people don't want to trade, you know, that they're holding like, yeah, I'm not going to sell those. Why would you use this thing as currency right now when it's inflating so much, like when

it's 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, a hundred million, $200 million 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, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses They offer a revolutionary approach to manage cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So how does it work? Well, you probably already know this, but it has become pretty trivial for an entry-level hacker to buy access and data about compromised businesses.

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this summer. Yep. So if you want cutting-edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. head on over to huntress.com slash acquired, or click the link in the show notes. Our huge thanks to Huntress. 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 of 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 paradigm.xyz 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. And then when the bubble pops and you sort of have a lot of the sort of late coming speculators that of course lose money, 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 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 $3,700 in March during the COVID liquidity crash to by the end of November, Bitcoin surpasses that all-time high of December 2017, hits $19,860 in November. And then by the end of December, by the end of 2020 on New Year's Eve, we're sitting at $29,000 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 40K, 4-0. Ultimately, the price goes all the way up to $42,000 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 $30,000. So the crash, quote unquote, we could have another crash, like we don't know, but this crash is still $10,000 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 $34,000, $35,000 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. Right. Could be at 3k, could be at 100 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. Well, let's contextualize that 650 billion dollars so the total consolidated assets of jp

morgan chase the largest bank in the united states is three trillion so that's about five times all the bitcoin out there is like at jp morgan alone from people who have who bank with them is five times bigger sort of an interesting number to keep in mind. I think Bitcoin, if you were to... It's actually pretty interesting. You go to the Federal Reserve's website and just look at what are all the settled accounts. Not within each bank, but at each bank, how much money does each bank in the US with a bank charter have on hand or 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 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 gone up quite a bit recently. 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, you know, 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 in compare, like it's a part of a portfolio. You know, a lot of people are likening it to gold. It's interesting. Which is about nine trillion. Nine trillion. 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 Bitcoin jewelry. Tell that to CoinDaddy, man. 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, which we'll get into all this as we 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, uh, this is, uh, 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 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, like a whole bunch. The obvious one that we've been banging the drum on through the whole episode and is probably the most powerful is network economies, I think. In particular, versus other cryptocurrencies. Like nothing, 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, like you can't start anything that looks like Bitcoin now and have any chance of beating it.

Like it's in the same way that Facebook just outran any other consumer social network, consumer social entertainment type app. And then obviously very smart in acquiring those who did get scale like 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 like the amount of computing power going into, 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 to 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, 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. And so even if you could create more fake bitcoins for yourself you have this massive disincentive to do that yeah as more people join the system yeah it'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 they rebalance this over time um but i'd provide enough incentive to the miners that if they were to make a call between being a malicious actor 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 the definition of counter- um you know of course with my editorial here is doing something that your uh that incumbents basically can't because they would

break their system yes and like there is no better example than than the u.s dollar like if uh the fed was like bitcoin's a really good idea and they they felt like actually that's the future they cannot uh the fed's centralized infrastructure and the u.s 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 and so it's not like it would ever be in the u.s 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 the u.s government frankly U.S. as a nation. Yep. Well, and just like network economies,

I think there's another level 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 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 credit card number system they can't go back and change that and make it into a public private key thing like the best that they can do i sort of i think they could i mean well they could but all those like ACH, like are you going to have, 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, that's true.

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 U.S. government has, and all governments who have fiat currency have bundled the sort of safety, security,

and amount of normalcy or normality of the nation with money. And like when people say the U.S. dollar is backed with the full faith of the U.S. government, like 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 U.S. dollars, please? And you're like, no, 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 i don't think an existing government who is the 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- Yeah, that's a good point. 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 um in this vein one thing that dilution idea i was talking about earlier where i was comparing uh 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 u.s dollars are actually held by non but like held

outside the u.s by people that are using it as hey this is like this is the way that the world denominates value it is the camera what the phrase is but like the reserve currency i think yeah yeah uh and it's something like 70 i don't quote me on that but it's it's more than half is held outside the u.s 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 the sort of hyperinflationary thing and people don't trust it as the global reserve currency anymore. But like, 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. Right.

Like that's what we're doing. That's actually a really good point where yes, you're hurting your own citizens with inflation, but you're all, you're also hurting these other countries that are whole, whose central banks are holding your paper, your dollars. That's something that like your own citizens,

there's, 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. They don't,

you can't do that where like you create a whole bunch of new money. I guess actually that's sort of what we're doing with the federal stimulus. Like we've created a bunch of new money and then we only give it to us citizens. That actually is. You can only, 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. 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 a 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, you know, 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 into view their own, you know, cause they're losing it. Like it's,

you got a super corner. 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. Yeah. 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 a hundred million dollars 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 like if people are gonna 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 you can probably repurpose your mining gear to other currencies there's transaction costs to switching it out of other currencies but like as compared to like ripping out an enterprise sass 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 $1,000 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. and it's not because of the brand. Like 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 to talk about in power that I should have talked about when you were talking about network economies is, again, going back to this comparison to the u.s 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 us USD in order to pay their taxes in it, or at least they have to, uh, they have to use it or maybe they're like accepting their wages in it. So money is flowing from literally every person in a, 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 a,

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 the government contractor lawyer, government contracts lawyer. Oh, nice. Yeah. Like it is, uh, I don't know if it should be nice, but yeah, it's, it 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 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, 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, you know, a gallon of milk and you, 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 of value so you know 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. And I bring this up because I want to talk about this phrase that people throw around in Bitcoin bubble and that we've talked about on this show. 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.

Like 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 where, sure, you could say like, oh, Tesla is a

bubble because it's relative to its current positive cash flows or any reasonable future positive cash flows that it could have. 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, and you're entitled to the future profits of it. Currency, definitionally, has no intrinsic value. Like, it literally, 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, you know, we're going to get into exceed our macroeconomic, academic and history depth here quickly. But yeah, this is the argument. Before 1971, there was some argument about the US dollar that it was pegged to gold and that 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. 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 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 dimension dimensions except for broad acceptability uh 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 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 um 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. Uh, there's cents, which, you know, represent the smallest amount that anything could really be worth. Or there's Satoshi's, which is one. So one, one thousandth of a Bitcoin, one 10,000. No, no, no. It's less than that.

It's one. I think it's 10 to the eighth, 10 to the seventh or ten to the eighth uh negative negative seven or negative eight so we may have to come up with something smaller than that if bitcoin continues to sort of rise um durable you have to go a long way from here totally durability i mean the bitcoin is like way way more durable than u.s dollars like we we rotate dollars out of the system every once in a while because they just get too ratty. And you hear Bitcoins are not going to degrade on a hard driver in cold storage somewhere. So there's this interesting... 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? 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 like 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 um in case to be clear certainly recent events in the u.s uh like the capital happening not but also recent events in China and all over the world. 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 trust isn't going down around the world right now. And if you're from Argentina or Greece or anywhere that's had sort of a currency crisis in the last few decades, you're probably jumping out of your seat right now going, you stupid Americans, get this through your head. This stuff happens. Just because you guys haven't had it happen yet, it doesn't mean it's not going to happen. 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 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 a hundred thousand dollars 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 I think 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, like, 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. Like 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 gonna experience inflation. Great, like I'm gonna 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 it's a 1.5%.

It's literally from mining. 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 one-ish percent versus 1.5 or 6%. 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 my biggest one was definitely this notion of bubbles as a go-to-market strategy my second biggest one is again i'm just 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 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 like, there's got to be more. It's only nine pages. I was like, oh, well, there's gotta be more, like there's got, it's only nine pages.

Like I was like, Oh, well there's gotta 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, well, what about this case? What about that case?

And then, but then you think about it, there is with like increasing the block size and like the, is forks that have happened. There was forks. Yeah. All this stuff, but like so small,

like so small like so relatively few things like you can 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 it's 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 you sort of dive deeper and deeper and deeper, you realize... Yeah, it's actually not great at that.

Right. Like what it is in its current form, because there's so many people who want to use it, it's kind of existing at a different level of the stack. Like if you look at the money stack, there's kind of like, well, there is the US dollar. And then on top of that, there's like the Federal Reserve reserve and on top of that there's like the 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 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 the central banks all work

on together yeah and i think like what we're seeing is that and and this is where i think there's going to be a lot of debate within the community and 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 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 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 defy 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. 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 when I pay my taxes, I pay them out of my bank

account. But when I buy something 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 is trying to factor in more of my why now to our playbook. Like, why did this happen when it is happening? And for Bitcoin, I want to talk about this idea that Nick Szabo brought up. He and Naval were on an episode of the Tim Ferriss podcast that we'll include in the sources here.

And 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 our brains haven't gotten haven't become any better computers but we've developed way better computers so how can we like 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 it's a little out there, but I definitely- Well, I think that's a lot of Ethereum. We'll talk about that when we do Ethereum 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 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, and 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 okay or that that should happen or anything. But just from the perspective of value building of the network, the fact that it happened, 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, you know, 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 when I look at Facebook, when I look at Airbnb, it's actually the same story. 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, but that's okay. Like that's a similarly with Airbnb, like what was Airbnb in the early 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 i think like many of our playbook themes if you were starting a startup david and you came to me and said, I'm going to eventually do this thing. 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, that's extremely unlikely. Well, I do think there's some applicability here of like yeah totally it's not totally apples and oranges there that you stair step up i think i

think uh ben thompson had an old article about this with with snap and laddering like you ladder up from like oh disappearing text messages to like you know 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 like it's so easy to write off bitcoin because of silk road but like if you step back for a minute 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 these types of apartments

is just the first set of 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. That's super, super powerful. Now there's an incentive in and of itself for people to come in and use your network. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yep, Vanta is the perfect example of the quote

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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. I absolutely want to talk about the comparison between how does the value created for the world, not just shareholders or potentially coin holders, compare to any value destruction that they have created by existing. 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, 0.2% of global electricity consumption. 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 0.4%, so almost half a percent of the world's energy production.

So on an absolute basis, for anybody who actually knows- That's 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 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 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. Using hydro, dam, like the Central Basin in Washington. That doesn't change. I mean, it's still still like that's a lot of energy right a lot 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 to oil and so yes 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, you know, race toward raising the global temperature by, you know, 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. 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 100,000 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, 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 uh 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, like they, you know, if they, 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. 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 screwing you over in one way or another. Or it just provides reasonable guardrails so that you can do higher level functions in life. And like, if you want to, 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, and maybe that's been the case for hundreds of years in your country, then like, you're going to keep being oppressed systemically. And 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.

This is, we're going to talk about this in grading 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. And as an institution, like you and I couldn't do that. Bitcoin, anybody can participate in this. 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. 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 10 X's, that would be amazing. But almost never are you going to buy a stock and it's going to 1000 X 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 sort of 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 but so far, no, it's been pretty poor for that. And Bitcoin itself. Now, I think very likely, if there's no Bitcoin, there wouldn't have been any Ethereum. And Ethereum and its derivatives probably, in my view right now, stand the best chance of building that layer. So maybe it's responsible, 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's definitive. It's a D or an F for its initial purpose so far, but pointed at stimulate innovation in that area. Yep. Okay. Next. Oh, I was going to 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 are need this to function as something like a U S 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 like, I know I'm going to have I need to pay my taxes next quarter. I want to make sure that I put this money away so that like, I know I'm going to have that money to pay my taxes next

quarter. Not good. Yeah. Yeah. It's interesting. Like to me from a store of value perspective, it's a great hedge. Like there still is the probability that it loses 80. There still is a reasonable possibility that it loses 60 70 80 percent 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 well and downside higher volatility there right if you put money into gold i'm probably going to be able to pay my taxes next quarter with by converting that

back out that's a fair point yeah it's it's super high volatility gold and and and again has i don't know that it's like uh i don't know 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 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 in this, we'll get into our last grading lens here, especially compared to cash, which and zero interest rate 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 of the park relative to that. Yeah, that's a great point. High volatility relative to that cash. But 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, that cash is just losing value faster than it ever has. Like we're not in a hyperinflationary environment, but like relative to where we normally are, it's not, it's certainly,

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 and like that talk about it, inflation, that's insane. You're losing 15% purchasing power every year. That's crazy. Um, 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 35,000x 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 it's 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, this is what I'm saying. I'm analyzing a venture investment.

Do I think this thing has a chance of being a 20x here and the answer is probably like if if like i probably think that or the answer is yes i do think that because if it's got this half a half a trillion dollar market cap today and the market cap of of what people are doing with similar products like the u.s dollar is you know there's there's 20 billion of those, there's $70 billion worth of that 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 times bigger than its current market cap. So do I think it has a 20x 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. 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're like, you know, especially if you go later in that stage investment you're like um you know especially you go later in that spectrum you're like graylock coming in and doing the series a of airbnb at a 60 million dollar 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 growth round phase of Bitcoin. Oh, you don't think we're in the post-public? No, no, no, no, no. Post IPO? No, because there's still all this upside. Like, will they, there's still risk. Like, you're investing in a growth stage company, right?

Like, you're doing a Series C in... Yeah, 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, so here's why I... I think you're in 2017 Stripe. Here's why I're there yet. 2020 Stripe. Well, so here's why- I think we're in 2017 Stripe. Here's why I think we're in 2020 Stripe.

Because Bitcoin, after it, in our little playground here, would go public. It still has like, 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 like 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. 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

upside. It accomplishes that. I think that's the IPO equivalent when that happens. 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 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, uh, and starts to eat into reserve currency, you know, et cetera, et cetera. Uh, so I think that's, I think there's still another after booster stage on this, uh,

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 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. David, I didn't expect, 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 I hope listeners, you enjoyed all three. We'd love feedback, particularly if you are an economist or in this ecosystem, or if you

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