Instant Genius - Bitcoin, with Brett Scott

Episode Date: June 12, 2022

Brett Scott, author of Cloudmoney, explains how cryptocurrencies work, and why he believes Bitcoin will never be a true currency. Once you’ve mastered the basics with Instant Genius, dive deeper with Instant Genius Extra, where you’ll find longer, richer discussions about the most exciting ideas in the world of science and technology. Only available on Apple Podcasts. Produced by the team behind BBC Science Focus Magazine. Visit our website: sciencefocus.com Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Plus taxes and government fees. GoogleFi Wireless is not subject to data traffic deprioritization during times of high network usage. This podcast is sponsored by name, audio and focal. Streaming has made music more accessible than ever, but true listening is about more than ease. It's about quality. British audio experts name audio, alongside French acoustic specialist focal, combine handcrafted tradition with cutting-edge innovation and high-end materials, delivering digital precision with analogue warmth.

So you can experience exceptional sound at home. Music just as the artist intended. Visit name audio.com to learn more. From BBC Science Focus magazine, this is Instant Genius, a bite-sized masterclass in podcast form. I'm Alex Hughes, staff writer at BBC Science Focus magazine. This week, I'm joined by the writer Brett Scott. He's the author of Cloud Money, Cash, Cards, Crypto, and The War for Our Wallets.

He tells me about Bitcoin and other cryptocurrencies, asking whether they can actually be viable currencies. People often have slightly different views on this. But to start off, what is a cryptocurrency? Well, the original version of cryptocurrency was Bitcoin. And Bitcoin is traditionally described as a decentralized digital currency, but I don't find that a very informative description. You actually look at what other Bitcoin system operates.

It's essentially a system for issuing tokens. So it's a token system. And it's a way for a network of strangers. So people who do not know each other, who are scattered across the world. the way for a network of strangers to kind of get together and follow a set of rules by which they will issue tokens and move them around between themselves. Now, historically, that's quite a difficult task to do historically how we move digital money between people would be to use these large central institutions like banks who will

keep track of account balances. So think about, for example, when you're interacting with your contactless card on the London Underground, what's happening is you're sending a message to your bank asking them to edit your account and to essentially transfer money to the account of the transport for London or the train companies essentially, right? So these big institutions stand between you and the other person you're, or the institution you're interacting with, right? The crypto systems or the Bitcoin system in particular was a system designed for trying to do the movement of tokens between a large-scale network of strangers

without the use of these central intermediaries. Unfortunately, though, the technological infrastructure of Bitcoin is ingenious, but the actual monetary part of it is very crude. So the way I often get people to think about it, and I actually was involved in the early

Bitcoin community, which was around 2011, 2012, so I've had a lot of experience with Bitcoin. It's very similar to, for example, if I was to give a a physical analogy. Imagine taking a big sheet of glass, for example, and then punching

a whole bunch of glass discs out of it. All right. So like crafting a whole bunch of, essentially, you know, disc-like objects. All right. And then handing them out and then saying, okay, here's a monetary system. Now, the crypto systems are very similar to this. Essentially, you have a system for like creating these digital objects, which are quite featureless.

They don't really have any kind of, they did, they basically just these sort of, you're imagine them as sort of floating digital objects as you can move around, right? And they are numbered. So they have the superficial appearance of being money-like. But certainly in the early days of Bitcoin, nobody quite knew what exactly these objects were. You could just simply assign them from one person to another, but there was a lot of confusion as to what exactly they were supposed to be. It was only later that the whole kind of speculative market developed around these, and they started to come to have a monetary price. Nowadays, many people sort of think of Bitcoin as a monetary

system, but really it's far more accurate to think about it as a almost like imagine sort of like limited edition medallions, digital medallions that you can pass around, right? So that have money like branding pasted over them, that you can use for forms of exchange, but that really rely upon the existing monetary system, right? Because you actually can't exchange Bitcoin for things unless it has a dollar price. the sort of mechanism via which, you know, for example, if you read a news story where they say, you know, a person used Bitcoin to buy a pizza, for example, a person buys something with Bitcoin, they're not actually buying anything with Bitcoin. They're using a process called counter trade. Counter trade is the use of non-monetary objects for exchange via their monetary price. And this takes a little while to understand, but one of the easiest ways to understand this is to think about, imagine you go into a store, all right,

and you've bought, let's say, a jacket, and you buy it for a hundred pounds. You leave the store, and then you decide, actually, I don't really like this jacket.

I want to swap it for something, I want to get my money back. So you walk back to the store, and you essentially, you have two options when you get to the store. They can either give you a refund. They can give you your hundred pounds back. Or they can say to you,

you can swap it for something of equivalent price. Okay. Now, let's say you choose that latter option and you say, okay, I want to get these pair of jeans for 100 pounds instead, okay, quite expensive jeans. But let's say you do that. Now, imagine you're an alien watching from outer space, this interaction. You will see somebody at the counter of the store handing over a jacket for jeans. Now, that alien might say to themselves, oh, it seems like these people use these jackets as a form of currency. What's actually happening there is that you're implicitly are returning. the jacket, getting 100 pounds, and using the 100 pounds to buy the jeans. Okay. Does that make sense? Yeah, I'm with you. All right. So that's counter trade. All right. You're basically using the monetary price of two objects to decide upon an exchange ratio. And it superficially looks like perhaps barter. Okay, but it's actually you're taking two monetary transactions, superimposing them over each other and then canceling out the money part. Now, that's how all Bitcoin, quote-unquote,

purchases happen. So when somebody says, I bought a pair of jeans for Bitcoin, and let's say the pair of genes cost 100 pounds, they had to first calculate how much Bitcoin they could buy for 100 pounds to decide upon the exchange ratio between Bitcoin and the pair of genes. So they're essentially, what you're implicitly doing is actually using pounds in that situation because your alternative would be to sell the Bitcoin for 100 pounds, use that to buy the genes. So a lot of these transactions in the crypto ecosystem are actually rooting through

the normal monetary system, but it superficially looks as though it isn't. And this is very easy to confirm because you'll notice, for example, when somebody quotes you a Bitcoin price for something, it constantly fluctuates every 30 seconds, well, basically every second as the price of the Bitcoin in a currency fluctuates. One of the places you're seeing this right now is in El Salvador, where it's sort of claimed that Bitcoin is now currency in El Salvador. But, you know, when you normally walk into a restaurant. Let's say you order a meal at a restaurant and you say the cost of the meal is $20. You expect by the end of the meal the cost is still going to be $20, right? In El Salvador, if you had to see the Bitcoin price of your meal, it would constantly fluctuate over the course

of your meal as the US dollar price of Bitcoin fluctuates, right? Because it isn't actually priced in Bitcoin. It's actually priced in US dollars and they'll be using that US dollar price to decide upon the counter trade ratio. Sorry, that sounds. is quite complicated. But the basic point is that actually most crypto transactions right now still root through the normal monetary system. But that in itself is very interesting, right? That's not a, that's not like something that's an invalid feature. So what is quite interesting now in the global monetary system is you're starting to see this much higher use of counter trade, as it were, that process of using non-monetary objects for exchange.

So you certainly can swap Bitcoin tokens for things via its money. price. And that is actually worth does have a lot of marginal or sort of partial uses. So, for example, if you are indeed a political dissident in a country where your bank account's being blocked, you might be able to use this as a temporary stopgap measure to survive, whilst being very aware that you're going to be subject to this extreme fluctuations in its price all the time. So could you say in a way that it's a slightly broken financial system that's hiding behind smart technology, or is it something that does work? It just takes a convoluted route to do it. You know, I'm often called a cryptoskeptic, you know, but I'm,

I don't really see myself like that, you know. I can see Bitcoin's got a very ingenious technological design. I mean, there's a very beautiful, almost mechanism to move the tokens around. It's just that the tokens that have been moved around are very crude. So it's a, it's a very sophisticated way of moving very crude objects around. And again, that's insofar as those objects become seen to have speculative values like collectibles, that does end up having certain uses. You can use volatile, swappable collectibles as a form of exchange. Just like I can use collectors edition medallions from an antiques shop if I wanted to. I could try to exchange those with people. But, you know, and this, Bitcoin is this like a much more sophisticated

version of that because you can do it across borders and stuff, right? So, you know, that's like a, that is an authentic use, but because I often reject the idea that it's actually a monetary system competing with the US dollar, for example, I get called a cryptoskeptic. But the way I tend to put it is, I like to call a spade a spade. And the act of calling a spade a spade is not the same as insulting a spade. Spades can be very useful. But people who have an interest in promoting Bitcoin as some kind of golden sword tend to get pissed off with me when I say it's a spade. They tend to get irritated with me. But for me, you know, that's useful. I've used those tokens before. I've counter-traded Bitcoin

for things in markets before. I can see its use for sure. I know Bitcoin comes with many technicalities and you've heard them all before, but do you think Bitcoin could technically become a currency or is it there are there too many roadblocks? I personally don't think so, no. But I come from a very particular way of thinking about money, which is credit theories of money where you essentially, which is a long kind of tradition in monetary thinking where you see money, or at least the most effective forms of money being essentially like systems of promises legally set within legal systems. Okay. So this is a tradition called chartilism.

At least, well, chartalism is one branch of credit theories of money. It sort of goes against a lot of the traditional way that money is presented, which is some kind of commodity. Okay, so credit theories of money and commodity theories of money tend to be at odds with each other. A lot of crypto imagery is drawn from commodity theories of money, whereas imagine that somehow money is some kind of like substance of value that carries value around. So if you ever hear these types of statements where people say stuff like money stores value or money is a, you know, payment systems or a value transfer system, they're invoking this kind of imagery of some kind of like substance that flows around, right? And it sort of carries value with it. This is very like commodity thinking on money, right? So it fetishizes money and somehow having this inherent value in itself. Whereas the type of sort of thinking I come from looks at money.

essentially kind of like access token systems. So units of credit that are passed around for actual goods and services. So when you look at Bitcoin, it has a lot of structural problems because it is essentially, if you think about gold, for example, like gold is often claimed to be a type of true commodity money. Even though historically gold was always issued by monarchs and was often sort of its value was often dictated by quote and quote by fiat. But at least superficially, gold looks like a commodity currency, right? It looks like it's a sort of substance of value that people can observe.

And if you compare that now to like you'll say your units in your bank accounts, units in your bank account are essentially, and this gets a bit complicated, but liabilities issued by banks, right? They're essentially promises issued by banks. Now, Bitcoin is neither of those. It's a sort of like, it sort of superficially looks like numbers you might find in your bank account. Okay. So it actually, it's, it's on a ledger in much the same way as a bank account is.

But it explicitly isn't a legal liability of any institution. It tries to associate itself with gold by kind of like wrapping itself in this branding, right, or this imagery of gold. And yet it kind of like isn't either of those things. And strangely enough, like quite a few what are called, like, gold bugs, people who sort of these sort of quite conservative monetary thinkers who believe that we should be using gold as money, reject Bitcoin. All right. So a lot of the old school gold bug community doesn't think Bitcoin actually qualifies as being

anything like a commodity currency. They essentially see it as a sort of digital unit just that's sort of masquerading as being something like gold. And you can kind of like test this if you went to an Olympic athlete and you said, do you want to swap your gold medal for a digital gold medal? And it's actually most human beings would be like, what is digital gold supposed to be? We value actual gold.

So I think Bitcoin has just a number of structural problems where it's constantly having to try and create this mythology that it's some kind of commodity. And yet at some level, everyone kind of knows that there's something like dubious about that. Which is why it's now so highly subject to these speculative flows. Because really it's just become an object traded

within the normal monetary system. And yeah, that's kind of where it's sitting right now. And I don't see how it's going to get out of that. Even if its price goes wildly up, that's not going to somehow turn it into money. Like when Apple's shares go wildly up, they don't become a monetary system. Talking about that kind of jump up and down

and some of the more problematic parts of Bitcoin in the cryptocurrency community, it allows non-finance professionals to get involved, they can make their own currencies, you don't have to be all that informed to invest. Do you think that's a flaw of the product or is that in some way actually a positive? I mean, I don't really, look, the history of financial markets was full of speculative things that people bet on, right? It's like, that's like nothing new. I don't really have a position on whether people should be betting on Bitcoin or not, to be honest.

Certainly there's been huge amounts of abuse. not only a Bitcoin, but just like general, the whole, all the whole cryptomania. Because any old opportunist could sort of set up their own, essentially digital machine to spit out tokens and then try to sell them to people for like pounds and dollars. Cyberspace is like littered with these useless digital objects that were branded as being something and they've been sold for like money to people, right? And, you know, but I'm like, there's a part of me that's like, okay, there should be some kind of like awareness raised as to how dodgy that is.

But I can sort of understand that many people in the global economy like the speculative thrill of trying to buy and sell these things, right? And it's unfortunately a lot of people get shafted along the way. And if you go into YouTube, for example, and you find countless testimonies of people who've lost all their savings and trying to like buy into some kind of crypto token. But again, that's not a particularly new phenomenon. and that's been occurring for like hundreds of years in financial markets.

I think what's quite sort of new about these crypto tokens is that they often have like no story. Traditionally with like highly speculative shares and things. You know, I actually used to work in financial markets, but like, you know, traditional speculative markets, it would at least be some kind of the shares being bet on would be an actual legal claim upon something happening in the world. So, for example, if you buy a biotech stock, it's a legal contract. that says if that group of people down there in those labs manages to do something and sell it to people, you get a legal claim upon the results of that. And that's a very highly uncertain

prospect. You don't know if they're going to be able to make the thing that they claim, but at least it is a legal guarantee that you can, and if they don't give it to, you can sue them. Whereas crypto tokens often just make zero claim as to like why you should buy them. It just be like, you should buy them because a bunch of other people are going to buy them. It's a purely self-referential market often. Not all of them, but like a large portion of the crypto tokens have been like that, which is why I guess a lot of financial regulators and sort of these consumer protection groups would be like, you should be extremely concerned about these because they operate heavily on FOMO, right,

this fear of missing out. So I'm sure you've seen friends around yourself who's suddenly asking you whether they should buy some kind of like dodgy token promoted by somebody on Facebook. you know, it's all over the place now, that kind of like speculative frenzy. But yeah, I don't really, I'm not necessarily moralistic about that, you know. That's something I guess we have to work out as a society. And I think maybe a good extension to what we were saying. At the time of this recording, cryptocurrencies are crashing in value, Bitcoin, Ethereum,

a lot of the big names and everything else that comes with it as well. Is that something that could be resolved or is the instance? instability, just part of the system? The instillability is inherent. You know, as I said, look, in traditional financial markets, let's take, for example, that example of a biotech stock I just, a share, I just mentioned. You know, let's say there's a company has 100 people and you can watch what they're doing. And, you know, in the earliest stages of a company like that, there's a lot of uncertainty.

You don't really know much about what's going to happen. So there can be wild fluctuations in the price of that share as people try to guess what's going to happen. But as you get more and more information, you theoretically are supposed to come to like a slightly more realistic price of like what you think the share is going to be worth, right? Because you're calculating the future prospects for this company. Now, so financial market bubbles occur when people are sort of wildly overestimating the future prospects of companies. But eventually those bubbles kind of like crash because people sort of see the reality, all right, as it sort of plays out into the future. The problem with crypto tokens is that there isn't really any tethering to an underlying story.

So you can never really tell if they're overvalued or undervalued. There isn't actually any methodology to work that out. Whereas in the stock markets, there are methodologies. There are people who will go out and argue that say that's massively overvalued because I know what's actually going to happen in the company. I know that that's overvalued. Right. There's this big battles.

Whereas in the crypto world, how do you make these arguments? because essentially these are often almost purely sort of self-referential speculative markets. And so, like, it very quickly can just crash out of nowhere, right, as a vague sentiment swing happens. Which is also why it's very dangerous to push this message that Bitcoin, for example, is some kind of like technology, some kind of like system that will be very empowering to people in the developing world. So a lot of these crypto promoters go and they try to associate crypto tokens with you know, helping people in, for example, you know, Uganda, there's a lot of, like, use of African countries in the marketing of crypto tokens. People say, oh, this is going to be

empowering for people in these places. And, like, actually, low-income families are pretty, it's pretty bad, and people are subject to, like, massive wild swings in prices of things when you have low amounts of savings, right? So it's pretty, like, irresponsible, I'd say, when you're trying to promote these types of investments to low-income communities anywhere in the world. That's what happens, though, of course. Thank you for listening to this episode of Instant Genius. That was Brett Scott. If you want to know more about the state of cryptocurrencies and physical money,

check out his book, Cloud Money. Or, to hear him tell me about the death of cash and why we should be worried about it, head over to Instant Genius Extra. available only on Apple Podcasts. The new issue of BBC Science Focus magazine is out now. Pick up a copy in store or visit sciencefocus.com. This podcast is sponsored by Name, Audio and Focal. The texture and emotional depth of music can be lost through digital sources or poor signal.

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