The Breakdown - Schmuck Insurance: Chamath Palihapitiya's Prescient 2013 Argument for Bitcoin

Episode Date: November 26, 2020

When NLW asked Crypto Twitter for recommendations of the best way to convince friends and family about bitcoin and crypto, one of the ideas was to review old articles that have stood the test of time.  With that in mind, NLW today reads Chamath Palihapitiya’s May 2013 piece for Bloomberg, “Why I Invested In Bitcoin.”  Even among prescient early pieces, this one is particularly salient.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDest. What's going on, guys? It is Thursday, November 26th, Happy Thanksgiving. So yesterday I did my episode about the most bullish signals, the most bullish facts, the most bullish events from the year to bring to the Thanksgiving table as you talk about Bitcoin and the crypto industry as a whole. Part of the way that I sourced that list, I obviously had some ideas going in, but I always like hearing from you guys about what you think is most interesting, what

you think the strongest arguments are. And when I asked earlier in the week on Twitter what people thought the most bullish arguments for Bitcoin were to bring into the holiday, one of the things that people suggested a number of times was to go back and read bullish articles from 2011, 2012, 2013 that had stood the test of time. This, of course, being a way to show that this asset has had long-term conviction, long-term belief that it has lived up to. Well, I thought it was a really good idea, and my strong guess was that not that many people were going to be listening to podcasts on Thanksgiving Day itself. And so I'm actually doing a second kind of Long-read Sunday. Sunday will have its own long-reads, and it's a doozy, 100K Bitcoin, get ready.

But this one is a throwback. It's a throwback Thursday, Long-reed Sunday, but for Thursday. You get what I'm saying. Anyways, we're going back to May 30, 2013. Chimath Palahapitia, not yet the Buffet of his generation kind of figure, just someone who had had some really profound success first with Facebook and then with his early social capital fund, but was always already getting a reputation for having some pretty serious insight. This gave us one of our most enduring ideas of Bitcoin as Schmuck Insurance, so let's listen to this piece from all the way back in 2013. Why I Invested in Bitcoin. The opportunity here is to think constructively about a world in which money flows are more transparent, Bitcoin, Easy, Bitcoin, cheap, Bitcoin, and secure, Bitcoin.

The weeks of speculation about whether J.P. Morgan, Chase, and Co. Chairman and Chief Executive Officer Jamie Diamond would be forced to give up one of his titles has ended. I didn't take a side in the battle, if only because I couldn't get beyond the threshold questions. Why does anyone even care? And why do we believe we are still beholden to people like this? Since the 2008 financial crisis, we've seen a massive decline in trust in the financial services industry. Lehman Brothers, Bear Stearns, American International Group, the London Whale, Cyprus, and a host of lesser scandals have prompted consumers to say one thing loud and clear. I don't trust you.

Or, you're only in it for yourself. Or, who made you king? Or some very reasonable variant thereof. It seems the financial services industry's best response is, trust me, I went to Harvard Business School. The point is that this fundamental trust no longer exists. In its place rises Bitcoin. This episode is brought to you by Crypto.com, the Crypto super app that lets you buy, earn,

and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the Crypto.com app today. Looking for the best way to stay on top of your investment game? nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io.

Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 10% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nex0.com. Bitcoin was launched in 2008 during the depths of the financial crisis. In short, it's a cryptocurrency that is completely electronic, peer-to-peer, unregulated and unregulatable, uncontrollable, uncontrolled or uncontrollable, by any government or agency. Each Bitcoin is simply a long string of numbers and letters that can identify itself within the Bitcoin economy to be

unique and legitimate. Bitcoin's can't be copied or tampered with. They don't exist in the real world, only on your phone, computer, or tablet. But they have the same value as physical currency. There are 11 million of these coins in existence today, and there will only be 21 million ever created. Similar to gold, Bitcoins are made by mining. But while gold is mined from the ground by bulldozers, Bitcoins are mined by computers solving complex mathematical equations. Each time you get a correct answer, you unlock a coin which can then enter the Bitcoin economy. These quirky characteristics may all seem like reasons to question dislike or fear this new currency.

Instead, these are a few of the reasons why everyone should hope it becomes a lasting part of the fabric of financial services. Why? When the Defense Advanced Research Project Agency first implemented a working version of the internet in the 1960s, it seemed like a fringe experiment not dissimilar to Bitcoin today. It wasn't until a protocol called TCPIP emerged in the 1970s and was commercialized that the internet was positioned to take off. In short, this protocol allowed every website and service built on it to have its own address and a way to communicate information. This averted chaos, allowing users to find what they were looking for, allowing websites to work together, and enabling networks to do the hardlifting of directing traffic in an orderly and predictable way.

Without TCPIP, the internet, as we know it, would not exist. Bitcoin today is in roughly the same development phase that TCPIP was back then. Instead of IP addresses and websites, Bitcoin has unique strings that represent money and a mechanism to send these strings securely and safely wherever you want. It is a protocol that is allowing money to flow around the world, much like TCPIP allows information to flow, in an orderly predictable way. This is not a theory. It happens every day. The Bitcoin economy, while still in its infancy, is about $2 billion, meaning the value of all Bitcoins, and rising. New services appear daily, exchanges, digital wallets,

payment processors, along with companies that accept Bitcoin alongside dollars, euros, or yen, for traditional services. In addition, a small and growing group of technologists are getting behind the currency, allocating time and capital to building a robust ecosystem. Bitcoin is being used all over the world in a wide range of ways already, to avoid the high fees of using a visa card in Sao Paulo, to settle the purchase of a million dollar home in Buenos Aires, to pay a mechanic for services in Lagos, to provide Egyptians access to a liquid currency. The list goes on. Bitcoin provides a safe way for anyone, anywhere to send, receive, or store his or her money.

By contrast, consumers are realizing that the traditional banking system shouldn't be trusted. Why store my money with strangers who may make crazy bets on derivatives, J.P. Morgan? Why keep my money in a bank that could threaten to seize it, Cyprus? Why keep my hard-earned savings in a currency that could be devalued because of an incompetent government, Argentina? All of this said, the emergence of a robust Bitcoin economy won't all be positive. Bad actors will use Bitcoin for drug dealing, porn, and financing terrorism. However, this already happens every day with gold, dollars, and other currencies. It's not a reason to shut Bitcoin down. Which, did I mention this? It's not actually possible

anyway. There is no central server, no central authority, and no owner. Bitcoin can be slowed but not shuttered, and even if the U.S. government decides it is anti-Bitcoin, many other countries will either tacitly or explicitly support it. China, Russia, Switzerland, Iceland, Singapore. Suffice it to say that the geopolitical ramifications of a robust Bitcoin economy are mind-boggling, beginning with a completely peer-to-peer banking system that works by and between people and ending with a world that no longer relies on the U.S. dollar as the reserve currency of all assets. The opportunity here is to think constructively about a world in which money flows are more transparent, Bitcoin, easy, Bitcoin, cheap, Bitcoin and secure Bitcoin. Does the Bitcoin economy need regulation? Possibly. Much like

virtual guardrails enable the internet to thrive, the Bitcoin ecosystem may need something similar to begin rebalancing the financial services landscape. The current price of Bitcoin is about $130. Some people think that Bitcoin will never become a useful currency, but rather a better version of gold or a replacement to gold entirely. If this is all Bitcoin becomes, a good question is, what would that make each Bitcoin worth? Well, the value of all the gold in the world is roughly $8 trillion. Assuming that Bitcoin can replace gold as a more useful store of value, then the upper bound of each Bitcoin would be almost $400,000. If Bitcoin grows into something bigger, a useful reserve currency, then watch out. Its value will far exceed $400,000. I personally think that

Bitcoin is already superior to gold. Its role as a currency is yet to be deterrent. but over the next decade, being gold 2.0 will suffice considering that it would represent a more than 3,000 times return. I've told my friends that it is entirely rational to allocate 1% of your assets to Bitcoin, as I have. Call it Schmuck insurance. As the 2008 crisis proved, schmucks can cause a world of damage. There's a famous scene in the Matrix where Morpheus asked Neo if he wants to take the blue pill and go back to life as he knows it, or take the red pill and see life as it is. Neo takes the red pill and begins a period of exploration about humanity, hierarchy, rules, etc. Bitcoin is a red pill. There will be some bad and awkward moments, but lots of good,

useful, and powerful things will also ensue. It will reallocate financial strength and power to the people versus keeping it within a few centralized authorities. I am hopeful that Bitcoin prevails. The world needs more red pills. Again, that was written seven and a half years ago. Happy Thanksgiving, guys. Until tomorrow, be safe and take care of each other. Peace.