BiggerPockets Money Podcast - 375: FTX, Fraud, and the Case for Cryptocurrency in 2023

Episode Date: January 18, 2023

Cryptocurrency is dead in the mind of most investors. What started as an awe-inspiring investment reaching massive multiples in just months, quickly became a subject of contention within the investing community. Some moretraditional investors called cryptocurrency an outright fraud, while others claimed it was the final puzzle piece in the battle for a stable fiat currency. Now, with many crypto prices down, is there any reason to invest? For long-time listeners of the BiggerPockets Money Podcast, you’ll know that hosts Scott and Mindy don’t have a terribly favorable view of cryptocurrency. Not because they think it’s illegitimate, but because of its massive volatility that has borderline bankrupted many inexperienced investors. We wanted a deeper insight into why cryptocurrency could be worth investing in, so we brought Laura Shin onto the show. Laura is host of the Unchained podcast, where she updates the crypto community on the latest news stories, price action, and more. Laura is an agnostic crypto investor with a level-headed view of the benefits and risks of investing in this volatile asset. She gives us a masterclass on the current state of cryptocurrency, the history of Bitcoin, why assets like Ethereum may be more valuable, and why exchanges like FTX are not to be trusted. In This Episode We Cover The history of cryptocurrency and how Bitcoin started a worldwide craze Ethereum vs. Bitcoin and why “ultra-sound” money could beat the rest The “crypto winter” and whether or not now is a buying opportunity for investors Money crypto vs. tech crypto and why there may be more than one coin left standing FTX, fraud, and how crypto exchanges can lose your coins, and the best way to protect yourself And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Scott's Instagram Mindy's Twitter Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Subscribe to The “On The Market” YouTube Channel Listen to The “On The Market” Podcast: Spotify, Apple Podcasts, BiggerPockets Check Out Mindy’s 2022 Live Spending Tracker and Budget Finance Friday: First Down Market? Here’s How to Stop Stressing Unchained podcast Bitcoin: Investing Fad or Final Bullet to Fiat Currency? Click here to check the full show notes: https://www.biggerpockets.com/blog/money-375 Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast, where we interview Laura Shin and talk about cryptocurrency. Hello, hello, hello. My name is Mindy Jensen. And with me, as always, is my coinless co-host, Scott Trench. I may be coinless, but I've never lost my keys. You'll get at that day and that percent of dollars. Scott and I are here to make financial independence less scary, less just for somebody else.

To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or when. or what you're investing in. That's right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or understand why people invest or purchase cryptocurrencies. We'll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Scott, I am super excited to talk to Laura Shin today. She is a wealth of information about crypto. I started off the episode, not quite a fan of crypto. I know that's not a surprise to anybody who has listened to this show before, but I am looking forward to learning more about it. Yeah, absolutely. Laura's a wealth of knowledge. We had a wonderful conversation.

And among other takeaways, I just want to leave you with this. I'm convinced after talking with Laura that crypto is worth at least playing around in 10, 20, 30, 40, 50 bucks to understand. And I hope you walk away with that takeaway today, too. I am, whew, I hate to admit when I'm. wrong. I really, really hate to admit when I'm wrong. I am going to agree with you, Scott, with the caveat, don't put anything in that you are not willing to lose 100%. Play around with it in very small amounts. Don't put $10,000 in if you can't afford to lose all $10,000 of those dollars. But before we bring in, Laura, we are going to give you a quick overview of cryptocurrencies,

what they're about, where they come from, and I think you're going to love it. has heard of cryptocurrency by now. You see ads trying to sell you crypto. You have finance experts talking about cryptocurrency as an increasingly normalized alternative to regular money. Crypto is here and it's here to stay. Some of us know quite a lot about crypto, but lots of people are still very new to the idea of cryptocurrency. Many of us still really don't know what it is or even how it came about, and that can make it an intimidating subject. When you look at the history of crypto, how it was invented, and why it becomes a lot clearer what the intention was behind this form of digital payment and why it became so popular.

The invention of cryptocurrency is widely attributed to an American cryptographer called David Chom, who had an idea in the early 1980s about creating electronic money that will be totally anonymous. That will be controlled entirely by the user. And it was a little bit of would be untraceable and unconnected to any central bank or centralized government system. So from the very outset, the idea of cryptocurrency was much more than a digital currency or having money that physically isn't there. It was much more about trying to create a whole system that would be controlled by the users or consumers and that would be independent from traditional banking systems.

Now, this is where the most important core value of crypto came about. It came from Choms' conference paper back in 1983, and when she talked about something called Digi Dash, which is a proto-cryptocurrency that he developed. And the idea behind it was that you used a computer system or computer software so you could get your money out of the bank. Now, this would require encryption, or an individualized key that would be sent to the recipient only.

So only the person withdrawing money had access to their transaction. not the bank. So the early idea of crypto still involved banks, but the idea behind it was already that you controlled your own money and you controlled the access. Nobody else. Now fast forward to the 1990s to the dawn of the internet era. And as someone called Nick Sosbo. This guy developed something called BitGold. Bitgold is the most direct precursor to Bitcoin, which is the most widely used form of currency we have today. The idea behind Bitgold was that you had to connect your computer and commit the power of your computer to solving mathematical puzzles. Essentially, the puzzle solving generated the power required for getting the reward, or coin. So this is where the idea of mining

comes into play. And this is essentially how computers mining for Bitcoin function today. The more powerful the computer, the better it isn't solving problems. And the better it is, bettered is at generating or mining the coin or reward. The only thing that Sosbo couldn't do was that he couldn't figure out how to get this process going without involving banks or central authorities. So this is something known as the double spending problem. And it wasn't solved. Actually until about a decade later by someone called, well, we should say by someone who called

themselves Satoshi Nakamoto. He wrote a paper called a peer-to-peer electronic cash system. And that was the beginning of the blockchain. Essentially what Nakamoto invented was the blockchain technology behind Bitcoin. In the very simplest form, blockchain technology is a structure for data that cannot be changed once it is put into place. So what Nakamoto did was he took a headline from the Times that was actually about the financial crash of 2008, which of course was one of the most important events of the 20th century. The story was about the bank bailouts and the crash of the financial system in the Western world. And that was the founding block in this chain of encrypted data that built Bitcoin.

This first block was actually what helped mine the first 50 Bitcoins. And it's what started the whole process of computers solving problems and generating the information, the data that is then encrypted into Bitcoin. The first 50 Bitcoins weren't valued or traded in any way on the stock market. However, Bitcoin eventually did go on the stock market, and by 2010, one Bitcoin was valued at 14 cents. And then later that year by the fall, it crept up in value to 36 cents. And then, by the end of 2010, it dipped to 29 cents. And this is how Bitcoin started to take off.

And you can't underestimate the power the media played in the ascent of Bitcoin. Forbes published an article about crypto in 2011, and that article made the price of Bitcoin skyrocket. And we actually saw the price rise from just under a dollar to almost $9 by the end of May 2011. So we're talking about unprecedented growth here. However, the value of crypto on the market has fluctuated considerably throughout its relatively short history. In the early 2010s, we were seeing the rise of Bitcoin competitors like light coins, to crop up. Some people called them altcoins. Some of them just branched off from Bitcoin. Others were based on different codes or different blockchains, but Bitcoin still continued to lead the market

in cryptocurrency and was doing very well by 2012. And that was a year that something called the Bitcoin Foundation was created. The Bitcoin Foundation was specifically created to promote Bitcoin and to make it available to wider audiences. There were also projects such as OpenCoin, again aimed at making Bitcoin more accessible, and making it better understood and generating more interest in cryptocurrency. The passage of crypto has never been smooth and it's never been consistent.

There have always been legal issues, federal criminal investigations, and ways of looking into the legality of Bitcoin as a system. So throughout the 2010s, you were looking at Bitcoin values plummeting and then rising again, and then plummeting and then rising again, sometimes in a single day.

day. The famous Bitcoin crash on November 19th, 2013, so the price of Bitcoin go from $750 down to $400 in a single day. And that was normal at that time and what Bitcoin users expected from the currency and honestly still do to a large extent. The 2010 decade eventually brought vast improvements in both the security of Bitcoin and its availability. Something called the Lightning Network was developed in order to make Bitcoin more secure. By December 2017, Bitcoin was trading for $20,000. And this is right at the same time when the main competitor of Bitcoin was ascending. That was Ethereum.

And it quickly became the runner up to Bitcoin. Ethereum is known for being much more inclusive than Bitcoin. Bitcoin is very much a closed network, while Ethereum opened itself up to other platforms for trading and using its blockchain from the Getsk, get-go, which was appealing to many people. Today in the 2020s, we are again seeing a pattern of fluctuating value in cryptocurrency. Every time Bitcoin undergoes financial regulation, prices drop or the value drops. And then with each new innovation, the value rises again. What keep Bitcoin a much need to boost was the fact that Tesla about $1.5 billion worth of it in 2021, which allowed

the value to go up again to nearly $70,000. Crypto has seen other headwinds such as the debacle with FTX and so on. Crypto will continue to be a volatile currency, a volatile financial system, and it's not for the faint of heart. At the same time, you know it will crash, and then it will rise again, and then it will crash, and then it will rise again, and that's just the nature of the beast. The future of crypto is unpredictable, but there almost certainly is. of future. All right, huge thanks to our esteemed producer, Kaelin Bennett, for sharing that with us.

Before we bring in Laura Shin, let's take a quick break. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your taxed refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress.

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I started listening years ago to make better use of drive time and workouts, and it stuck. At this point, I've logged over 229 audiobook completions on Audible alone, and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger Leaner Stronger for Fitness, the Anxious Generation for Parenting Perspective, and several Arthur Brooks' audiobooks that have been excellent for mental well-being. What makes Audible so powerful is its breadth. Beyond audiobooks, you also get Audible Originals,

podcasts, and a massive back catalog across business, health, parenting, and more, all accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. And we're back. Laura Shin is a cryptojournalist, host of the Unchained Podcast, and author of The Cryptopians. Idealism, greed, lies, and the making of the first big cryptocurrency craze.

She's also the first mainstream journalist to cover crypto full-time. and her podcast and videos have had 20 million downloads and views. So it's safe to say that Laura knows a little bit about crypto. Laura, welcome to the Bigger Pockets Money podcast. I'm super excited to talk to you because I don't know anything about crypto. Yeah, I'm excited. We hear. And also, it's 25 million now.

Oh, 25 million. Oh, I'm sorry. If it better, yay. So it sounds like there's a lot of people who are interested in crypto itself. Our audience is mainly real estate investors. Can you give us a very brief description of what crypto is and how many different crypto options there are? So crypto is a sort of nickname now for what people generally call cryptocurrencies, but more precisely should be called crypto assets.

And some of the currencies would be a subset of the wider crypto assets. And when I say that the broader term is crypto assets, there are some cryptos or crypto assets that function more like, for instance, you could say digital oil rather than digital money or digital cash. So many of them are structured in different ways. So it's sort of similar to how we have many different other investments in the world from stocks to commodities to bonds, et cetera. So within crypto assets, you can have different types of financial vehicles or instruments that are all kind of structured with this certain technology or formed with this certain technology. So walk us through the investment thesis. Why do people

invest in cryptocurrencies in a general sense? And how do they choose specific ones? So crypto got started with a white paper in October of 2008. And it was the Bitcoin. white paper and the subtitle of it was a peer-to-peer electronic cash system. And what was unique about Bitcoin at that time was that it was yet another attempt at digital money. This had been attempted before. And yet this time it was quote unquote decentralized, meaning that it wasn't controlled by any central actor. Now previous attempts at digital currency had some entity that had centralized control over this digital money. And so they could, for instance, be shut down by a government. But with Bitcoin, because there was no company or CEO or any kind of set of executives

or anybody, there was nobody to, you know, say, you're the ones in charge. We're going to shut this down. We're going to put you away. Whatever. And the reason that Bitcoin can exist and yet still be decentralized is because Bitcoin, the asset, the current, has incentives built into it. And so, for instance, let's say that you had a digital currency that was created by a company. They would need to hire, for instance, an IT department or something to make sure that the system didn't get hacked. Now, Bitcoin, like I said, there's no executive, no board.

They're not hiring people. However, the Bitcoin software is designed so that every 10,000. minutes, there's essentially this competition where people, if they contribute computing power to the Bitcoin network, they are entered into this competition to win new Bitcoins that are minted by the software every 10 minutes, on average every 10 minutes. And so early on, when Bitcoin was kind of worth nothing, people, especially at that time, it was mainly, I would say, cypherpunks, which were this group that had been interested in creating this kind of money that was not controlled by government. And also libertarians who were also interested in that kind of thing,

they were really the ones who very early on saw a lot of value in this. So oftentimes they were the ones that they were hooking up their computers, running the software that, like I said, was creating new bitcoins every 10 minutes. And they were the ones winning those coins and they thought this is going to be valuable someday. little did, you know, anybody realized just quite how valuable it would become. But the point is that to them, they are trying to win these coins, but to Bitcoin the network, Bitcoin the blockchain, it's getting security. And when I say security, what I mean is if you want to take over Bitcoin, like if you want to, I don't know, make some counterfeit transactions or something, if you want to

change the ledger, then you have to get more than 51% of the, or 50% of the power on the network. They call this a 51% attack. And the one thing is, even if you get 51% or more of the power, you're limited in what you can do. You can probably do maybe some small-ish number of counterfeit transactions. You could maybe change very recent history, but anything that's like a bit older would be super, super, super, super, super, super hard. But anyway, point is that, So when people hook their computers up to the network to try to win coins, they are making it harder to attack Bitcoin. So that's how they're sort of replacing this IT department. And like I said, it's through the incentives built into the coin. Doesn't decentralization kind of lend a hand with things like the FTX crash and other things like that?

No, no, no. FtX is completely centralized. It's an exchange with a company and a CEO and a board. Well, it didn't have a board that was one of the issues. But it's totally centralized. They, like, another aspect of a lot of these decentralized networks is that the ledger is completely open in public. So everybody can see all the transactions with FTCS, obviously, it was a company. So everything was closed source. It was, you know, private to them. So that's how they were able to keep this hidden. And apparently, at least from what has been known so far, only four executives knew.

Like I've even talked to some of the high-level executives, they had no clue. it was being held as a secret. So no, when things are decentralized, so let me just explain how a blockchain works. And then you can understand how it is that decentralized things force everything to be public. Well, not always. If you use really, really, really fancy cryptography, you can make them private and also a blockchain. But, you know, it's very few of those right now. So I'll just explain how a basic blockchain works.

So let's say that you and I are all part of a village. And it's just, I don't know, like 100 people. Our financial system would be that every day at noon, we would get together in the town square. And we would all call out all the financial transactions we had in the last 24 hours. So I could say like, oh, I paid Mindy five bucks for a loaf of bread yesterday. And Scott would say, you know, I paid Laura 10 bucks to give me a ride to the air. report or something. And everybody would have ledgers and we would all write down all of their transactions that are being called out. Now, the thing is none of our specific ledgers is the

ledger that's in control or the one that's like the one everybody will look to you as being the the main ledger. We all agree that no one person has the right ledger and that instead the correct ledger is the one that's sort of like in the cloud that the majority of all the ledgers agree upon. So if like I'm sick one day and I'm missing a bunch of transactions, then as long as the majority set all agree on something, then everybody in the village knows that's the correct ledger, whatever the majority of the ledgers say. So that's essentially a blockchain, except instead of the villagers, you just swap those people out for these anonymous computers all around the globe.

And when I say that we would call it the transactions once every 24 hours, in Bitcoin, it happens on average every 10 minutes. That's what's called a new block of the blockchain, a new block of these transactions. Like you're batching all the transactions and adding them to the ledger all at once. In Ethereum, that happens every 12 seconds, roughly. And in other blockchains, it can be even faster. But that's essentially what a blockchain is. It's a chain of these blocks of transactions or batches.

of transactions. And the way we can all check the ledger is because it's public. There's these websites called Block Explorers. And you can go onto it, for instance, like a Bitcoin Block Explorer. And you can see all the transactions on Bitcoin since Bitcoin got launched in January 2009. Same with the Ethereum blockchain. EtherScan is one of the most popular block explorers.

And it has all the transactions since it launched in the summer of, 2015. So essentially that's a blockchain and that's why, at least especially for the early ones, everything is public and visible and open. And also everything's open source because anybody in the world can contribute to the code base. It's just like a community project is how you can think of it. So even the code is open to people unlike how, you know, with a company, they would generally have their code base private. We recently talked to Saifidine Amos, who is a very big Bitcoin proponent. He has some nasty sentiments around other coins.

I think the term he professionally uses as coins. And one of his thesis for Bitcoin, you know, that we were able to, it's kind of like digital gold. It's a very hard currency. There's a clear, finite amount of it. It's very hard to produce. It's very secure. All this computing power goes into securing the blockchain for it. You mentioned earlier this concept of 51 percent of the nodes in the blockchain to a computing power, essentially, to change the code.

No, not to change the code, but to attack the network, to try to change the ledger. Thank you, yes. So we're obviously amateurs trying to become journeyman in this. Wouldn't his thesis is that the blockchain is really single purpose and that it's only potential use case then is for the winning. currency, which may, in his opinion, will be Bitcoin. Can you walk us through why the blockchain, you may or may not disagree with that and why the blockchain may have applications for other coins that may not have the same computing power and therefore are vulnerable to a 51% takeover? Yeah. So Safedin is, you know, the author of the Bitcoin standard. He, all of his content is about Bitcoin. And I think he would style himself as an Austrian economist. So,

he's definitely coming at it from that kind of libertarian angle. And, you know, as a journalist, I'm, I don't really have any particular coins that I, I look at the facts and, like, I'm not trying to root for anything, you know, one way or another. But in my reporting, I would say that there is kind of two main groups now, but in the crypto community, which are maybe the money crypto people and then the tech crypto people. And Safedin is definitely a money crypto person. And many of the money crypto people are Bitcoin proponents. And so he's really looking at cryptocurrencies and crypto assets through that lens of, you know, this non-governmental money. How could that be used? You know, how could that basically maybe take away government's power

or, you know, whatever. Why is this better than gold, et cetera? The tech crypto people say, hey, you know, Bitcoin's awesome. And Bitcoin was the first real, the first application, what's of any blockchain. And, you know, it's sort of like email was the first big thing on the internet. And, you know, I mean, they think Bitcoin's hugely important. And yet they're also saying, oh, there's actually a lot of other things you can do with the technology as well. You can make lots of things decentralized.

And many of them are trying to take products and services that are available or that would typically be offered by a centralized company on the internet, you know, sort of what we've seen the last like 20 some years of the dot com revolution, where, you know, when people want to offer something online, they form a startup, and maybe they get some seed funding, then venture A round, venture B round, blah, blah, blah, whatever, maybe they go public. But with these other crypto assets, what they're saying is, hey, maybe we can offer these products and services in a decentralized fashion. So what I'm going to do is this is going to be a slightly long answer, but I'm going to just

explain what Ethereum is so people can kind of understand, yeah, because Ethereum is the second largest crypto network, and it is very distinct and different from Bitcoin, and it's actually what's enabled a lot of these other decentralized applications. So it's important to understand that base layer that all these other things rests upon. So the creator of Ethereum is Vitalik Buterin, and he, at the time he conceived of Ethereum, was a Bitcoiner. He was actually Bitcoin journalists traveling around the world and writing about it and meeting different Bitcoin communities. And he noticed that a lot of people were trying to innovate on Bitcoin by, for instance, launching a new blockchain that tweaked some of the aspects of Bitcoin and maybe

added some new features. And he thought, well, if we're doing it that way, then whenever people launch a new chain that has features that weren't available in the old chain, then suddenly, you know, the old ones will be obsolete. And he thought, why can't it be more like an app store where people can't dream up whatever they want and have it be a decentralized application. So similar to how our current app stores have things like cooking apps and photo apps and finance apps and product. You know, it's just, there's so many different kinds of apps, right? Productivity apps. And so his thought was there should be an app store, but for decentralized applications so they can be decentralized like Bitcoin. So he thought, okay, there should be a blockchain then that instead of having all these different

features is boiled down to a programming language, and then people can program decentralized applications on there. How do I boil down the essence of the thesis of someone who is really into Ethereum or another cryptocurrency? What do they believe fundamentally is the long-term value of these currencies? Well, I could probably talk about Ethereum. So I think a lot of – so, for instance, we would call Safedim. a Bitcoin maxi, meaning it's a short term for Bitcoin maximalist.

And there are ETH maxis out there. So these are people who believe that ether will be kind of the coin. Then, by the way, I personally think that actually, if not the majority, then some huge, at least plurality or some, I don't know, maybe it's like equal parts across all three. Some huge number of people just believe there's, it's going to be. like our traditional financial world today where there's many different assets. And it's not going to be literally just one thing. So anyway, okay, eth-maxis.

So let's see. What they would say is that ether has utility. So I should explain actually why you kind of quote-unquote need ether to run Ethereum. Ethereum, being this world computer requires that you pay some ether for computation on the network. So if I'm just making a simple payment,

like if I send you an ether, that doesn't cost very much what they call gas. Like you can equate it to, yeah, making a trip in your car. Just a simple payment is like it takes very little computation, so it's like very little gas. Now, if I'm going to do something more complicated, like mint and NFT, that is a unique object, right?

That takes kind of a lot of gas. So that's like, for instance, driving from like New York to D.C. or something I'm going to say. So it costs a lot more gas. And so that's why people need ether is because they need to pay for these different types of transactions. You can also use ether to help secure the network. Ethereum is different from Bitcoin in that it's not electricity that you add to the network to

to help secure it. You quote unquote stake your coins and that means you're locking up your coins for some time period and while they're locked up, you can be entered into the regular contest to win new ether that's being minted. But the more coins you have, the more power you have in the network. The number of coins is really, you know, what determines the security of Ethereum. They call that proof of stake. So anyway, point is that ETH Maxis would say that Ethereum or ETH has utility.

And so if you look at all the major trends in crypto ever since basically Ethereum's launch, they all started on Ethereum. So for instance, the initial coin offering craze, which actually was the, that's the major subject of my book, is it describes how we went from the launch of Ethereum in the summer of 2015 to about two and a half years later, this global phenomenon of crypto, which all happened with these initial coin offerings on Ethereum. So, you know, that was one. Right. During the ICO craze, the NFT thing started because they're, well, first of all, actually, the OG NFT collection called Cryptopunks launched in the same year. But then also there was this really popular game called Cryptokitties. And it was so popular

that you couldn't even use the blockchain. It was like the most traffic jammed blockchain ever, you know. So anyway, point is NFTs became a huge trend. Also got started on Ethereum. There is another one called decentralized finance. So literally like all these major trends, there's another new one called decentralized autonomous organizations or Dow's. All of these started on Ethereum. So, ETH Maxis would say, okay, ETH has utility. And now just about two and a half months ago, Ethereum underwent a change in, first of all, how they're, you know, they switch from the electricity version of security network to this staked version. And then the other thing that happened is they changed the monetary policy. And with the new monetary policy,

the more Ethereum gets used, the more deflationary the supply of ether will be. And so Bitcoin, for the longest time, the Bitcoin proponents have said that because there's a hard cap on the number of Bitcoins you can have, which is $21 million, we're not there yet, but in about 120 years roughly, it will reach that cap. And the vast majority of coins already have been mined by the software or minted by the software. So, you know, it's pretty much very close to the cap already. Now, Ethereum naxies would say, oh, but, you know, now the more usage we see on Ethereum, the more coins get burned, meaning they get kind of sent away to this place where they can

never be retrieved. And so that reduces the supply of ether. And it is true that, yes, since this event happened a few months ago, the supply of ether has been, you know, more deflationary. So that's why the eth maxis would say, from this point forward, since the supply will likely be on this more downward trajectory, that's what makes Ethereum more deflationary and therefore when you, you know, construct supply, then the price goes up. Awesome. So I'm not making a currency bet. I'm more thinking about Ethereum or ether as literally like gas.

There's a finite supply on earth, and it's useful and it's needed for this application. And therefore, by investing in it or holding it, I am going to see an increase in its real value over time. Yeah, yeah. It's sort of a similar argument, I would say, to like the dollar where, you know, like, yes, of course, obviously it's the currency of the United States, which is the biggest market in the world. Or wait, shoot, I'm just realizing, is it China or the U.S.? Anyway, well, at least has the biggest financial markets. But then on top of that, it's the global reserve currency, right? So there's demand for it, even outside of the U.S.

So there's this kind of clear, quote, quote, utility. So that's sort of maybe how Ethereum people think of it. But one other thing I want to say is if you hang out with the ETH maxi crowd, you will hear them often be talking about ultrasound money. And the reason for this is that the Bitcoin community has long called Bitcoin sound money. And now because Ethereum changed its monetary policy to actually be deflationary, whereas like I said, Bitcoins will be inflationary still for another about 120 years, even if it's only slightly. Now they're saying, oh, well, yeah, OK, Bitcoin is sound money, but ether is ultrasound money.

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9-88 suicide crisis helpline is funded by the government in Canada. Okay, so Laura, what is the current state of? crypto. What coins are performing and which ones aren't? And a side note, are there any indicators to watch out for it to help you determine which coins will perform or will not perform? So right now, crypto is in what we would call a crypto winter, which is when the market is way down from the previous all-time highs. So if you were to look roughly a year ago, like I think it's the end of November 2021, Bitcoin reached a high of $69,000. I actually don't know what it is literally this moment like today, but I think the last time I checked it was roughly maybe like 18,000.

So obviously that's a massive decrease. And what's significant about that is that it actually takes us below the all-time high from the last mania, which was at the end of December 2017, 2018, which that hasn't happened before actually. Every time there's one of these manias, even after the kind of bear market that will follow it often, the new kind of low, is still higher than the previous cycles high, if that makes sense. Hopefully this is not too confusing for people. But all I'm trying to say is, the crypto industry is super, super down. The markets are way, way down.

But I think, you know, what happens typically is during those, you know, crazes. A lot of kind of get rich quick types come in, a lot of scammers, a lot of people who will just try to prey on newbies. steal their money. So when it's this more kind of bare market and the prices are depressed, then you're left with like the true believers and the people who are actually trying to build something real. So what I would probably say for 2023 is that because of all the different collapses that have happened this year, that we're probably going to see a lot of regulation or because it's hard to get regulation passed in the U.S. actually, I don't know if I would

say we're necessarily going to see a lot of it passed. but we will see a lot of discussion about it and maybe, you know, some legislation passed here and there. But if there's any piece of that legislation that kind of threatens what the community perceives as, like, important principles of decentralization or ways of maintaining that decentralization, then they are going to fight tooth and nail over it. Like, we've seen this time and again where they won't be like, this legislation doesn't make sense. It's impossible to, you know, make things happen that way. like, you know, you don't understand the technology, blah, blah, blah. So I expect that we'll see some of that. And in terms of figuring out which coins will do well, like nobody knows the answer to that.

You know, I tweeted something like, you know, because of all the challenges the crypto community has seen in the last six months or, you know, nine months or whatever, what lessons will you take from this year? And somebody wrote, you know, do not invest in? in anything you can't explain, which I personally, because I know who this person, like, I don't think that's a lesson that they knew, but this was a lesson, or that they learned, but it's a lesson where they already knew that and they're just reminding everybody else. Like, that's what you need to do. And, you know, that's what I agree. Like so many people always say to me, what should I buy?

What should I invest in? And no, no, no, no. If you're making your decision based on asking some other person what you should buy, then you don't even know, first of all, why you're buying. second, you don't know when to sell. You don't really understand what you're buying. Like, you should be able to explain what you're buying and why. You should be able to explain, like, what's valuable about it, why this is a good price for it, blah, blah, blah, et cetera.

If you can't do any of that, then, like, you shouldn't be owning it. So I actually, what I often talk about is, and Scott asked me about this earlier, or I can't remember his question, but, like, he might have framed it as, like, investing in crypto. I often actually tell people, you know, you could also just. say, hey, this is like a new technology. It's sort of like learning, you know, how to use email when the internet started or how to browse the web or whatever. So what you could do is you could just say, okay, I'm going to give myself like a mini course.

I'm going to put, you know, whatever, 50 bucks, 100 bucks, even 10 bucks into, you know, crypto. And I'm going to then learn how to send a transaction. I will try to pay my friend or pay myself or, you know, whatever at a different location. or I will try to buy an NFT or I will try to create an NFT. I will try to vote in a Dow. I will try to, you know, like you can do borrowing and lending on these decentralized protocols in Ethereum.

Like, you know, I'll try to participate in decentralized borrowing and lending. I'll try to, you know, do a transaction on a decentralized exchange. Like there's a lot of things you can try out and educate yourself that way because, frankly, since these cryptocurrencies function like digital cash, and when I say cash, I mean literally, like, if you lose it, you're not going to get it back unless whoever took it from you would send it back to you. So you need to learn how to keep your coin secure. If you don't know how to keep your coin secure, you definitely shouldn't be, quote unquote, investing in this. So, you know, you need to kind of just learn, like, how does this work? How can it be stolen from

me. How can I lose it? Like, you know, et cetera. How do I keep it safe? All of that. I don't want to interrupt you, but all of this stuff you're saying, I'm like, yes, yes, yes, yes, yes. This is exactly what I'm saying. I don't understand crypto. I am on record multiple times as saying I don't understand it. So I currently have zero dollars in crypto. I absolutely agree with you. If you can't explain it to somebody, you shouldn't be in there. And all these people who were taking out loans on their houses to go invest in crypto, not knowing anything. I'm like, oh, that's the worst thing. Why don't you just throw that money out the window as you drive down the expressway? I used to cover personal finance. So can you imagine sometimes when I'm covering this industry,

I'm just like, oh my God. It's, yeah. It just breaks my heart. Let's put it this way. You know, the way I got into crypto was that I was covering personal finance. And frankly, I'm not going to I was getting a little bit bored of it. And my editors threw me a bone and they said, oh, well, we have this idea to do a Forbes FinTech 50 list. Do you want to head that up with another reporter? And she and I divided into categories. I took the category of digital currencies. And I just became obsessed.

But the other thing was that, you know, for the other categories I had, because like it's the FinTech 50 list, right? I could see that these FinTech companies were basically like putting a digital veneer on our decades-old banking system. but that Bitcoin was like an actual leapfrog in technology. Like it's like not using any of that at all. It's like a complete, it's just replacing all of that with something brand new and different, like something never seen before in history. And that's why I became super interested. But like I said, like, you know, you, because it's something that hasn't existed before in history and because it represents money, you need to learn how to keep it secure. And this is why so many people have lost money, not like because the value of their coins went down,

but simply because it literally got stolen or fished from them or they locked their money away and didn't know how to access it again or whatever. There's, you know, like you need to understand how to keep your money safe, your crypto safe. Let's talk about that and specifically exchanges because it's one thing to invest or own Bitcoin directly through the blockchain. You can also do it through intermediaries, right? These can be crypto exchanges. They can be investment platforms like Robin Hood.

Let's walk through what's going on there because it looks like, we don't know exactly yet, but it looks like FTX and some of these other exchanges are susceptible to problems that our banking system with the dollar solved 100 years ago with bank runs, fraud and these other types of things. what's going on with these exchanges and how does one protect themselves? So you will often hear in the crypto community, not your keys, not your coins. And what that means is your keys are what are called your private keys. And every coin that you have will be at an address.

And this public address is where people can essentially send money in so you can receive money there. but then what sends the money out of that address is the private key. So this is why only you should have access over that. Or if you keep your money on an exchange, then they will manage your private keys for you. So, you know, this is kind of a controversial thing in crypto because there have been so many exchanges that have been hacked. Just imagine it's this massive honeypot for hackers, right? you can access like tons and tons of what's essentially digital cash if you manage to get into the systems of one of these exchanges, right?

So most famously, the exchange, Mount Gawks got hacked for 850,000 Bitcoins, which I don't know the exact number of that today. It's in the billions for sure, like many billions. And at the time, it was like half a million dollars. And that was in, you know, early 2014. So, you know, just to give you a sense of. you know, how much money that is. Now, there have been other hacks of exchanges. And like I said, what happened? So the Mount Cox accreditors are called the customers who had money on the exchange.

They still haven't gotten any of their money back. And they're probably only going to, they're probably going to get it in the next few months, and they're only going to get cents on the dollar. And the reason is the way our laws are, I think, or I mean, this is being processed into Japanese. Japanese court, but I think according to the Japanese laws or whatever, all the amounts that people get will be in fiat currency, not in crypto. So if you had 10 bitcoins on the exchange, you're not going to get like, you know, so let's say the percentage that people are getting back is like 10%. You're not going to get one Bitcoin back. You will get whatever the dollar equivalent was from, you know, whatever, I don't know, Bitcoin was probably worth like a thousand

bucks at that time or something. I don't know. I'm not sure how it may be wrong on the details. but the point is you're getting dollars back. You are not, or Fiat, you're not getting your crypto back. So that's like, you know, one bad thing. However, I don't want to say, and so this is why, because crypto people have been burned time and again with having their coins on exchanges, a lot of them will say not your keys, not your coins.

However, so what's the alternative? The alternative is that you have to keep your own coins safe. And not a lot of people are really good at that. So you might have heard about the guy who he had a bunch of coins on a hard drive. And he threw out the hard drive. And it was like hundreds of millions of dollars for the coins later when the price went up. So he actually is trying to get the town where he lives. And he might have even been able to convince them to do this to excavate some of the big

landfills in the town. And I think he, I don't even remember all the details. He might have said, like, I'll give you. send the money or whatever. And then famously, there was a New York Times article that started with this one crypto executive who he, again, had hundreds of millions of dollars worth of, I think it was Bitcoin, on a device that was supposed to be this very secure device. And it was so secure, it only gave you 10 tries to guess the password. And if you did all 10 and you didn't get in, you got locked out forever. And he had forgotten the password. He was on eight tries and he was like

sweating bullets. And this was years ago when this came out. The funny thing is afterwards, so many people said to me, did you hear about that guy? And I was like, this is not one person. There's like five million people that have done, or not five million, probably like, you know, whatever, some number in the thousands or maybe one million that have done a very similar thing. Like so many people have lost their coins because they've been trying to manage it themselves and they can't do it. So it makes it sound like, you know, there's no solution. That's not the case. It's just the technology needs to mature. And I actually just did a, an interview on what we call our premium offering where like people subscribe to get extra interviews

with me. And this person that we featured is they have a wallet where you will manage your own private keys, but you don't have to literally actually manage the keys yourself. It has kind of a biometric aspect. So the wallet will, you know, whatever, see your eyes, or I don't know what the biometric aspect is, but then there's probably some other piece of it. I can't remember what that second factor is. But then the third factor is liveliness, meaning like a hacker couldn't just put up a photo of you

to the phone or the device and open your wallet that way. So anyway, point is people are building new products where it will make it so that you can't so easily lose your own keys. I have a feeling maybe people will flock to those because, you know, it just sounds like, oh, that solves the problem of, you know, losing your own keys. So anyway, yes, this is why people are very wary of centralized exchanges. And then last piece I'll say, and this kind of brings us to the recent news. FTX obviously was the most recent example of people being burned by having trusted an exchange with their private keys, right? And this is very different from Mount Cox.

Mount Cox was definitely incompetence that CEO did not know that the exchange was being hacked and had been very slowly being drained of much of its Bitcoin for months. I don't know how he didn't know that. But, you know, if you read about him, you'll read. He was just sort of this guy with a cat and like not much else. But anyway, point is, FTX was very different. It's like, you know, kind of combined Bernie Madoff with Elizabeth Holmes, type of situation.

You know, he's been charged with eight counts of fraud by the DOJ. Additional fraud counts by the SEC, more fraud by the CFTC. And then the two of the other three executives who appear to have known about the fraud already pleaded guilty. And I can't remember how many charges each of them had. But anyway, point is lots of fraud. So, you know, again, what is it? There's like more than a million creditors on FTX. And so it's a lot of people that are

learning this less than the hard way. But the point is that, yeah, there's, this is only given more momentum to people wanting to take control of their private keys. And we're also seeing now that exchanges are trying to give their users confidence. And so a number of them are doing what's called proof of reserves, which is, you know, showing that the number of bitcoins that they hold in their wallets or addresses is, you know, the same as what's owed to their customers. This is not a complete picture because they could have liabilities that we don't know about that exceed that amount and that would cut into what they can give to their customers. However, it at least is something.

And so I think, you know, it's just giving kind of renewed momentum toward, yeah, toward making sure that people can keep their coins safe. Well, this has been fascinating. We have a lot to learn. This, you know, about 45 minutes we spent with you, answered some questions and opened up a ton more. I can see now how investing in cryptocurrency in any format really involves a philosophy and a practical understanding of how to do it, mechanically, how to keep it safe. That's on par with investing in real estate. Laura, thank you so much for your time today.

We really appreciate it. And we'd love to continue the conversation at a future time. Yeah, thanks for having me. I really enjoyed this. All right. Scott, that was Laura Shin. from the Unchained podcast, the Cryptopians book. She was amazing.

And honestly, she kind of changed my mind about crypto. I mean, I'm not jumping in with millions of dollars in crypto, but I'm going to go have a conversation with Carl about Ethereum and Bitcoin and maybe start looking at things. I don't know that I'm going to go with that dog coin. Yeah. Well, I think we learned a lot today, right? I think, look, we learned from Saifedine a week or two ago about the investment thesis behind Bitcoin and why there's an argument to be made for a decentralized currency.

We learned a little bit about the thesis for Ethereum and Ether and why a maxi there might argue that, you know, around utility. I think there's lots more exploring to do to understand the investment thesis, the fundamental reason why you believe you'd want to invest in other cryptocurrencies. You know, lastly, to invest in crypto require, is not just you go on, you know, Robin Hood or your e-trade or whatever and purchase some crypto, not your keys, not your coins. And there are problems that have arisen, especially with some of these newer exchanges, not like, you know, that are not publicly traded U.S. firms that have really resulted in huge losses. So I think it's every bit as difficult to really understand and invest in mechanically as real

estate investing, and you really got to have that philosophical thesis nailed and understand why you think that it's going to rise. So I'd love to have a couple of short discussion with you, though, Mindy, on a couple of concepts around our philosophy with investing in crypto or not. Okay. My philosophy has always been, I don't understand it, so I'm not going to do it. I think that is a well-thought-out philosophy. If you don't understand something, you shouldn't be investing in this. This goes all the way back to David Stein. on like episode 79 or something. I can't remember what his episode number is right now.

But he said the same thing. If you can't explain what you're investing and you shouldn't be investing in it. And so, you know, we talked about this a week or two ago. I think that's perfect, right? I can't help myself. I have to understand. I have to try to understand all of this stuff. And where I'm at is, you know, Bitcoin.

I understand the Bitcoin maxi thesis, I think, at a fundamental level. And I just don't understand. I can't justify putting my money into Bitcoin and waiting for that thesis to transpire instead of investing in a hard, tangible asset with utility. I don't want to invest in a currency. I want to invest in something that is going to appreciate in value, that I can add value to that I can control, that can produce cash flow like real estate, like businesses, like the U.S. economy in a general sense.

And then, you know, now that we've kind of unpacked, unwrap the thesis around Ethereum, I understand that as well, but I don't really want to invest in a commodity, for example, or something that necessarily has that kind of utility that's used as a currency. Again, same concept. I want to invest in something that can produce cash flow and that I can control and add value to. And so that fundamentally still informs my thesis, and I'm waiting for, you know, the philosophical argument that is convincing for me about why a cryptocurrency should become a major part of my net worth, aside from a store of value as an alternative to the dollar. Lastly, I want to point out one other thing that the U.S.

One of the things I think that's attractive about crypto to a lot of people is the concept of the soundness of the money, the hardness of the money. And I think that the U.S. Federal Reserve in the last year has shown that they're going to do what it takes to restore faith in the U.S. dollar and kill inflation. And I think that's a killer or that's a, that's a serious blow to some of the thesis around crypto, right? If the Federal Reserve is going to pound interest rates at the level that they did in 2022 and in 2023 come, you know, heck or high water, I'm not to say the other one on this. I think that that is, that confidence in the U.S. dollar, at least for the next few years, the next decade or so, perhaps.

We're not going to see hyperinflation because we're, you know, bent on defeating that. And I think that's a blow to crypto and restore some faith in the dollar as returning to that lower inflation level. Well, should we get out of here, Mindy? I believe it is time, Scott, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, stay shiny. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at YouTube. com slash bigger pockets money bigger pockets money was created by mindy jensen and scott trench it is produced

by caylin bennett research and writing by anna cotra additional research in writing by caylin bennett editing by exodus media copyrighting by nate weintraub lastly a big thank you to the bigger pockets team for making this show possible