We Study Billionaires - The Investor’s Podcast Network - TIP 030 : What in the World is Bitcoin? (Investing Podcast)

Starting point is 00:00:00 This is episode 30 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. All right, how's everybody doing out there?

Starting point is 00:00:29 My name's Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And today we've got a really fun one for you because this one's not what we typically talk about. And we're going to be talking about cryptocurrencies that have emerged on the market in the last three to four years. And I think for a lot of people, they have no idea what this is. I know I didn't. You just go back six months ago. I had no idea what this was.

Starting point is 00:00:58 In fact, I heard Bitcoin being mentioned in the news. and I just completely ignored it. Had no interest in it at all. I didn't know what they were really talking about. I just thought it was probably like some type of internet scam that was going on and pretty much ignored it. Then recently, I don't really remember how I came across this, but I started doing some reading. I think it was because I was researching ways to prevent inflation on currencies, and I kind of came across an article on Bitcoin, and it gave a general idea of what it was.

Starting point is 00:01:31 And so it kind of piqued my interest. And I started talking the Stig about it. And he was about as skeptical as anybody else on the street. Isn't that right, Stig? Probably a lot worse. That's to be quite honest. So I told Stig, I said, well, let's stop reading these internet articles that we have no idea who wrote these things and what this is about. I said, let's go find a really good book that is written by somebody that has some credibility.

Starting point is 00:01:58 And let's do some research on this. and just read some more and learn about it. So we felt like it'd be kind of a fun topic to talk about on the podcast. So that's why we went out and got this book. And the book that we used for our discussion and to learn about this, it's called The Age of Cryptocurrency, how Bitcoin and Digital Money are challenging the global economic order. This was written by two Wall Street Journal, journalists, Paul Vigna and Michael Casey,

Starting point is 00:02:27 having read the book, it's a pretty large book. What was it like 350 pages, Stig? Something like that, 400 pages maybe? Yeah, something like that. It was big. It was good. They were very thorough.

Starting point is 00:02:38 That's what I liked. And I thought that their arguments were pretty balanced. I think that they were definitely buying into the fact that cryptocurrencies are going to be the future. But I think that their discussion on Bitcoin and some of the other cryptocurrencies that are out there was pretty balanced. And they gave a really good discussion. So without further delay, Stig and I are just going to take. kind of jump into this and talk about cryptocurrencies in general. We're going to be pulling some pieces from the book and some other pieces with just general discussion.

Starting point is 00:03:08 So our outline for today, we're going to first start off by talking about what is money. So we can have that discussion before we dive into this cryptocurrency stuff any further. But before Stig and I started recording, we quickly went through the outline of what we were going to be doing for today. And we both agreed, money is simply an accounting mechanism to keep. track of your work performed. And Stig threw out another one by Ray Dahlia. Go ahead, Stig. You can tell you.

Starting point is 00:03:36 Yeah, so Red Dahlia, he's talking about what is the value of the work that you produce. And I guess we can always, you know, say that's controversial because then we can talk about minimum wage and what a billionaires. Is that really because that they are, you know, producing more value? But basically, to think of in terms of, you know, if you work more, you get more in pay. I mean, I think that's really good accounting mechanism as president is saying in terms of, well, what is money really? Well, and Stig's talking more about the supply and demand of your skill set. So if you're a neurosurgeon and you know how to operate on a person's brain, well, you have a very specialized skill set that only a very few people have in the entire world that have the accreditations that do that kind of work.

Starting point is 00:04:22 So you have the enormous demand and there's a very small supply that can actually perform that labor. So obviously your value of that work performed is a lot higher than somebody who is flipping burgers at McDonald's. It's just a fact of life that there's a lot more value being added in that task. So that's what money is. It's an accounting mechanism. So whenever you look at a balance sheet, an income statement, you are keeping track of all the exchanges of your work performed. and whenever you're buying a piece of material, somebody had to perform work in order to create that material.

Starting point is 00:05:02 And so all that work is basically stored in these dollars or whatever form of currency, if you're over in Europe, you're using euros. But in general, money is nothing more than an accounting mechanism. So with that idea, that's where we want to start with cryptocurrencies because it's really hard. I think it's really far-fetched for a lot of people to think that there's just bits of data that are going to be used as money in the future.

Starting point is 00:05:31 And I'll tell you, after reading the book and after seeing the technology that exists for this, I really do think that, and I think you already kind of see this, but it's just kind of a mirage for a lot of people that whenever I send money to Stig in Denmark, it's done through just a digital transfer. You know, it's not an actual dollar bills being sent anymore. And I think that a lot of people have, they're actually experiencing a form of cryptocurrency in a way, but they really don't necessarily recognize it for what it is yet. And I think it's only going to get more dramatic as time goes on based on some of the stuff that we were reading in this book. So Stig, did you have any other comments on what money is or anything like that for the start of the show?

Starting point is 00:06:13 Actually, I come to think of a story here. So we actually see this monster systems, you know, all over the world. So we are seeing that in dollars and euros, as president was talking about before. But I just thought about this the other day when I was buying Apple dollars. So I was actually buying dollars that Alaset is worth something. And I think I've rented a movie or something like that. So basically, you know, this is really just a question of what we agree with this. So that is also a measure of value.

Starting point is 00:06:44 I mean, I think I've rendered a movie for like five bucks or something because that is the value that Apple is providing me. So I just thought there was a funny story. And I think that in addition to that, I think that if you would get like a gift card, it may be like a restaurant. If it's not redeemable, you're basically putting your money into the currency of whatever that restaurant is or whatever, you know, you purchased the gift card for it. But that's a whole other discussion. We'll just keep moving here. So what's the purpose? Why did Bitcoin and cryptocurrencies emerge in the last five?

Starting point is 00:07:19 years call it. And there's really two main reasons. And the first one I'm going to talk about, the next one Stig will talk about. But the first one is that governments cannot increase the supply of this cryptocurrency. And so that might sound like a really far-fetched idea for people because it's, you know, bits of data. But how they're actually doing this is they have an open source, and we'll talk about this more later on, but there's open source program algorithm. And it's open source, meaning that there's a group of people that work on it. It's just not one person. And what they've done is they've programmed the algorithm so that it cannot produce more units or coins, if you will, of that system. And so there's, let's just say there's a hundred coins.

Starting point is 00:08:08 Okay. And let's use an example of myself, Stig, Hari, and Colin, the four of us. Okay. And if there's a hundred coins and we divide up those hundred coins, each person has 25 of those coins. And the computer algorithm will not let us use any more than 100. You can see how we can keep track of each other's in that little micro economy. If Stig performs some work for me and I give Stig five of my coins, my account is now at 20. His is now at 30. And Colin and Hari would then still be at 25. And the way that Bitcoin works, and we're getting into a little bit of the technical, but we'll talk about that now while we use that example. So the way Bitcoin works is I would have a piece of paper. Imagine I'd have like a digital piece of paper and each one of us would have a digital piece

Starting point is 00:08:56 of paper. So Stig would have one, Hari would have one and Colin would have one. And so whenever that transaction between Stig and I would take place where I would give him five of my coins, I would update my digital piece of paper so that it says that I have 20 coins and Stig has 30. Stig would also update his digital piece of paper. So it says that he has 30 and I have 20. And so would Hari and Colin, even though they weren't involved in the transaction. So basically everybody updates that ledger. And that's what it's referred to in cryptocurrency is the ledger is updated.

Starting point is 00:09:30 And so although there was no money, there was nothing physically exchanged as far as the currency goes, the fact that everybody has an updated ledger of where the accounting took place, that's how Bitcoin or any of these cryptocurrencies work. And I find that really fascinating. One other thing that I want to quickly highlight, and I'm getting way off topic, but while I'm on a roll, I want to talk about this. They talk about the different forms of money and how the best type of money to use. And so when you go back into hundreds of years ago, the type of money that they that they would always try to use was something that was very durable, something that could hold up over time. Something else that they wanted to use was something that couldn't be replicated or just produced on a whim like paper.

Starting point is 00:10:17 And so that kind of talks to the reason why cryptocurrency has really emerged is because you can't increase the supply of the money. So that's what they're trying to get around here is all these governments, they're printing money through the nose. They're just printing as much money as they can because then that drops the value of their currency. It increases their exports out of the country, which produces their GDP to go up. And so what you have is this race around the world for people to devalue their currency by printing more. And so this cryptocurrency solves that problem by stopping that by having a fine amount, a limit, a cap, if you will, on the amount of currency that's in the system. The other thing that's nice is that it's completely durable, meaning that you can't break it or, well, you could potentially hack it, which we'll talk. about later, but it will last. It's not like it's going to wear out. The other thing that's,

Starting point is 00:11:11 that's nice is it's very small. It's, it doesn't, you know, it's not something you even put in your pocket. It'd be something you'd use over your smartphone. So those are the advantages. So it's really kind of interesting to see how this developed and what they're trying to solve here by fixing the inflation, the currency inflation issue. But there's another reason that Bitcoin has emerged, and that's what Stig's going to talk about. Yeah, and that's really all about cutting out the middle, man. So right now we're using banks. And as you're probably all aware of, it's really expensive using banks.

Starting point is 00:11:45 So I know this from my own experience. Whenever I were doing transactions, you know, that is extremely expensive. So not only because I would have to convert that in my own currency, but also because the bank would charge me just for receiving that money. And then when I'm doing my accounting, then my accountant will also charge me for using a new currency. So when you have different currencies or actually just sending money to each other, even though it's the same currency, you have some sort of transaction cost. And since banks as a whole really have a monopoly or close to a monopoly on that, things tends to get

Starting point is 00:12:22 very expensive. So, you know, whenever I heard about this cryptocurrency and whenever I start reading a book, you know, this was really where I grabbed my attention. Because I was thinking, well, how can I avoid paying all of those fees? So I think in that sense, I think it's really interesting. So in say it in the developed countries, I think it's really interesting talking about how can we avoid paying those fees because basically Bitcoin that is,

Starting point is 00:12:50 I don't know if it's entirely free, but the transaction costs almost nothing. So that's one side of the coin, really. The other side, that is developing. countries. Because one thing I found was really interesting was that they were talking about that 2.5 billion people throughout the world don't have access to a bank account. So, you know, I think that was really interesting because cryptocurrency could really, you know, lift up the whole living standard because you need to have a bank account. Really, that's what's one of the fundamentals to

Starting point is 00:13:23 improve your living standards. So I thought that was extremely interesting, not just from a, you know, a personal point of view, but also from a more humanitarian point of view. And another thing related to this is also that you have a lot of countries that might not be developing or develop, but say something in between. So just to give you an example, something like China or Argentina. And then you have restrictions of foreign currency, so how much foreign currency you can have. So I think that's extremely interesting from your whole system point of view to have a currency that everyone have access to. So one of the lead program developers for Bitcoin, I was watching a video of him. talk about Bitcoin. And he said, the best way I can describe this is it's like having a bank in

Starting point is 00:14:07 your pocket. Every single person is their own bank. So if I want to send money to stick through Bitcoin, there is no transaction fee. It's just, you know, I can just straight send him the money. There's really no delay at all for him to receive those funds. He might want to wait a little bit for the encryption to work itself out so that he can see that it was actually a valid transaction and that there wasn't double spending that occurred. But, I mean, it's instantaneous and there's actually no transaction fee whatsoever. So that's what's really, I think, exciting for a lot of people that would potentially be using this. If the currency could actually have a pretty solid and steady rate at which it can be exchanged into other currencies,

Starting point is 00:14:50 I think that you would really see this start taking off. But because it's kind of all over the place, you're seeing a lot of hesitation for people to start adopting this. Okay, so what we're going to do is we're just going to go through some of the technicalities of how this stuff works. Because I think a lot of people are probably interested in knowing, well, how in the world, who's hosting this software and all that kind of stuff. So like I said earlier, this is open source architecture software, meaning that if you've ever used Wikipedia before, that's the exact same thing. That's open source software that allows people to. to come in and create updates to different pieces of information and you revolutionize the way that the encyclopedia works because everybody around the world is contributing to the information

Starting point is 00:15:36 that's housed in that software. So Bitcoin works very similar. And I know that that might have some concerns for people because they think anybody could go in there and edit the source code. But it doesn't necessarily work that way. You have a group of foundational developers that provide updates to the software, but the original software, the source code, was written and is put out there. And so you're probably wondering, well, who in the world wrote the source code? And that's where things get really funny, fun. I don't know what the word is. Interesting. Scary. All those. What were you going to say Stig? I was going to say scary. I really enjoyed this part of the book, though. So the founder of Bitcoin specifically, because there's a bunch of these cryptocurrencies out there. We're talking primarily Bitcoin because that's the one that pretty much has the only market cap that's worth watching.

Starting point is 00:16:36 But the founder of Bitcoin created this source code in 2009, which I find it kind of ironic that that came right after the crash of 2008 whenever we had this financial meltdown. I thought the timing of that was pretty interesting as well. but this person he goes by the name Satoshi Nakamoto. Is that right, Stig? My in Japanese is not that good. Sounds right to me. You can see we're like hardcore Bitcoin people. We don't even know the name of the founder.

Starting point is 00:17:05 But Satoshi was the founder of this, or at least that's the name that this person goes by. They say it's a pseudo name, and no one knows who this person is. A lot of people think that his Satoshi name is fictitious. I read some stuff where, based on the timestamps of when this person was working and posting in the forms whenever they are developing this, they think that a lot of the time lines up with an East Coast U.S. time frame and that the person wasn't actually working this in Japan. But there's, I mean, there are so many different accounts.

Starting point is 00:17:38 I mean, if you want to read some funny stuff on the internet, try to type in his name and just see what you get. And you're going to find a lot of people that have theories and hypothesis of how bad. Bitcoin was created, who the original founder is. There's people out there that think that it was actually groups or organizations. Some people think that it could be government organizations that created this. But in general, it is a really fun discussion and research topic if you guys want to start digging into that. So why the person wanted to be anonymous? I have no idea. But for some reason, this person who created Bitcoin did not want people to know who they were. And I will say that whenever he did this, he holds a very large number of the Bitcoins, correct?

Starting point is 00:18:21 I don't know how many, but I think it's a very large chunk of the Bitcoins. This founder still has them. And so I think whenever the price was up at like $1,000 of Bitcoin, this person was a billionaire. Whoever they are, they became a billionaire whenever the price was at high. I don't know if they're still based on the current market price because a Bitcoin right now is like $250. So it's open source architecture. That's what we were talking about. And so people can add to this and adjust it.

Starting point is 00:18:49 But the developers add changes very, very cautiously where they go through testing. And you could read all about it. But it is a very cautious implementation of code. And so you might be asking, well, that's really scary. And I think that it is a little scary to think that just random people that you don't even know could be adjusting this code. and then lead developers who you also don't know are adding the code into the open source architecture. But one of the things that I think that I need to throw out there that I think kind of

Starting point is 00:19:20 counterbalances that concern is that the people, the lead developers on this, probably own a lot of bitcoins. Well, I know they do. They own a lot of bitcoins. And the last thing that they want to see is for this thing to fail because they've got millions of dollars tied up in this because they own so many Bitcoins. So I think that that's a good counterargument. I don't know if that's something that.

Starting point is 00:19:40 you want to throw 100% of your trust in, but that's probably what would maybe counterbalance that concern. So like we said earlier, there was 21 million bitcoins that are going to be the final number of bitcoins that are released into the public. Right now, there is not 21 million bitcoins in existence. There's far less than that. I want to say there's 14 million bitcoins in existence, somewhere around there. And what happens is, is the, the bitcoins are, they're going through an inflationary period, which we said couldn't happen. But it is happening, and I'll explain why.

Starting point is 00:20:15 So whenever Bitcoin first started, there was only a finite number of coins. And what happens is, is this computer algorithm is going through and releasing more Bitcoins into the system. And it'll max out at $21 million in the year like 21 something in a hundred year. period. But a majority of the Bitcoins are going to be released into the public over the next couple years. I think from 2016 on, your inflation rate on Bitcoins goes down below 5%. It's very small number of Bitcoins. And I think that the reason that they had that is because they expected the number of users to continue to increase with the inflation of the coins. But within a decade from now, the inflation rate is going to be very low, like a 2% inflation rate that you'd see in a

Starting point is 00:21:04 regular currency. And then as time goes on and you get further into the decades, it's pretty much no more bitcoins being released. And they actually say it'll be deflationary because some of the accounts that are going to be used, people will forget the passwords and then those coins will be locked in that account forever. So kind of a really, it's really just, all this stuff is fascinating to me. I don't know. I thought I found it extremely interesting. Stig, what are your thoughts? Yeah, I was really blown away about this book, at least from more ideological point of view. I think sooner we were talking about or later we were talking about whether or not we want to invest in Bitcoins. But I think this man, he must be one of the most, or organization Nagamoro, he must be one of the most brilliant guys.

Starting point is 00:21:50 It will walk this planet because, you know, thinking about putting up a system to revolutionize the whole monetary system and just inventing that, And that's amazing. I mean, how can you come up with that? Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future.

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Starting point is 00:26:05 That's Shopify.com slash WSB. All right. Back to the show. I'll be honest with you. I went and I read some of his original writings, this Satoshi Nakamoto's original writings that are out there on the internet. And it is mind-blowing. I totally agree with you.

Starting point is 00:26:24 I think this guy might be one of the smartest people that I've ever come across some of his writings before. For him to understand, because he has to understand a lot of different things here. First of all, you've got to understand contracts because these are really smart contracts that are taking place. He has to understand encryption to just like a ridiculous level, which is extremely difficult stuff if you've never studied encryption before. And then you have to have this unbelievable understanding of economics, macroeconomics, and how exchanges take place.

Starting point is 00:26:58 And this person would have had all this knowledge. I just find it, you know, I find it a little hard to believe that it's just one person. But maybe there is just this total savant out there that just created this. It's really quite fascinating. So let's go a little bit more into the technical real fast so that you can really have an appreciation for what I'm talking about. So you know how I was saying that there's going to be more Bitcoins added to the system over this short period of time to get them all out into the economy. And so how those are being released is an idea called mining. So if you remember how I was telling you that I would have like a virtual piece of paper and I would be keeping track of every one of the people's accounts in our small group.

Starting point is 00:27:40 Well, that's what mining is. So if you have a computer and you want to mine, meaning you want to keep track of the leg, of all these different accounts, you can do that. And what you're doing whenever you're keeping that ledger, you're constantly trying to solve like a puzzle. And it's an encryption puzzle. And if you solve the encryption puzzle correctly, you're the one that basically validated all the transactions

Starting point is 00:28:04 on this blockchain that's ongoing. And this is very technical. We are breezing over this because we have, at least I do, I don't know about stick, but I have troubles understanding it myself to a very detailed level. But in short, these miners are validating the transactions by solving these puzzles, these encryption puzzles. And whenever they do that, they receive Bitcoin for doing that and basically housing the ledger

Starting point is 00:28:30 on their computer. So that's how the new Bitcoins are being added into the system is that they are being, they're basically rewards to people that are using or housing this ledger and saving this ledger and confirming all the transactions and keeping it. And so with the founder, this Satoshi, had in mind whenever he was developing Bitcoin was, I need to get a bunch of people to house this ledger on their computers. And once I get enough people that can do that, then the way that payment basically will take place whenever all the Bitcoin's max out is there will be a transaction fee, but it'll be very minor

Starting point is 00:29:07 transaction fee that's paid to the people that are confirming the transactions. So that's a whole other story in itself, and it gets very detailed whenever you start getting into some of the technical. So that's all the more that I was going to talk for the technical unless you had anything else that you wanted to add Stig. No, I think it's, yeah, I don't get all this, Preston. I'm just listening and I really appreciate that you explain to me how this is happening. I've got to be completely honest for you. I thought there was a really a hard part of the book, really understanding the technical part. So, you know, another good reason why this Nakamura guy, he couldn't be alone doing this thing, how he can program this whole thing and do everything. I have no clue how one person can do that.

Starting point is 00:29:48 That's the other part is like, yeah, so he has like this amazing understanding of economics. But then now he has to go program the initial code, the foundational code, this open source architecture code that does all this. I find that really hard to believe that one person did this. And I think that's what really piques a lot of the interest within the community of people that are. really tracking this closely is like, so who did this? What group did this potentially? It is fascinating. But anyway, let's go ahead and move on to the next thing because I think I confused everybody enough with the technical piece. What we'll do in the show notes to kind of help people out because whenever I was reading the book, I was really trying to understand it. And there was parts where I was really having difficulty understanding it as well. But I went and supplemented that with some videos that I found on YouTube on how the technical piece of it works. We will have that in the show notes. And I'll tell you, folks, come watch this on our show notes so that you can

Starting point is 00:30:43 see this, because it is really quite fascinating. I think you'll get a kick out of it at the minimum. Okay, so we're going to briefly talk about how Bitcoin has performed to date. So whenever Bitcoin first came out, there was, you know, this supposedly Satoshi basically mining all the bitcoins onto his computer. Then he told some other people in this encryption forum. That's where this originated about this. And so then other people started doing it. just for fun and they were getting thousands of Bitcoins and saves on their computer, which were completely worthless at the time. And then as more and more people adopted it, there was the very first purchase that took place where a person from England paid for a pizza, Papa John's

Starting point is 00:31:26 pizza for somebody in Florida. And I think they exchanged 10,000 bitcoins for that pizza. So that means that the transaction for that pizza was a $10 million dollar transaction. transaction if that person would have held onto those and then sold out at whenever Bitcoin hit $1,000 a coin. So I find that hilarious. And I think that that's going to be pretty interesting. You know, if Bitcoin, you know, looking 10 years down the road, 20 years down the road, if it does appreciate in value, which is a huge if, I think people will look back at that first transaction of 10,000 Bitcoins for a pizza and maybe just be just blown away. But that's how Bitcoin's first got its first transaction with really monetary value or something of real value to it was a Papa John's pizza.

Starting point is 00:32:14 Then what you had was, have you ever seen these young kids that play Magic the Gathering where they've got these cards, these magic cards, and they're like trading them? I don't really understand the game, but I've seen kids play it before. There was a website called Mount Gawks. And Mount Gawks was somehow the acronym has to do with Magic the Gathering. That's what they actually sold at Mount Cox was Magic the Gathering. And so a lot of this crowd of people, these magic people, were some of the early adopters of Bitcoin. And so Mount Gox, which was this internet trading site where you could buy these magic cards, you had people start trading Bitcoins there and trading them for real money.

Starting point is 00:33:00 And that's where there started to be. It was basically the first open market for Bitcoins. through the years, this is Mount Gawks, I guess the founder of Mount Gawks, the person who was running this exchange, really had no idea what they were doing whenever they started getting this influx of all these Bitcoin people trying to trade their Bitcoins for currency. Had a huge fallout because the person mismanaged some of the exchanges. Millions of dollars were lost. I think the person might have gone to jail who was running it. I don't really know.

Starting point is 00:33:30 But there was a lot of people whenever they hear Bitcoin and they hear, like the negative vibe that's associated with it. It almost all goes back to this Mount Cox thing because whenever the Mount Cox, kind of that company fell apart, you saw the price of Bitcoin just go through the floor because I don't think there was really an exchange for people to trade their coins anymore. And so then that had an impact on the price and people were just trying to get rid of them. And it was a whole fallout.

Starting point is 00:33:56 So where you have a big misnomer is a lot of people thought that there was a hack or there was something wrong with Bitcoin in the software itself. there was not. It was actually this third-party company that was basically acting as like a stock exchange of these Bitcoins that fell apart and had issues. And that was the reason that you had the major price go down. I think it was, was it before or after Mount Cox? I don't remember. But the price of Bitcoin basically started, just had this massive acceleration. And I want to say what was that? Back in 2013, Stig? Yeah, just early 2013, yeah. Okay, so early 2013, you saw the price of Bitcoin go from like $100, $200, $200, and it just went through the roof. It went up to over

Starting point is 00:34:38 $1,000. I think it got up to like $1,200 or $1,200 a Bitcoin. And then you just saw it's go down ever since. From 2013 till now, you've seen it go down and go down and go down. And now it's at around $250 a coin. And who knows where it's going to go from here? That's the big if. So that's kind of been the performance of Bitcoin to date. Stig, did you have any other comments for that piece of it. No, I think I'm all good. I think you explain that very well, Prest. Thank you, sir. Thank you. Okay, so let's go to the next thing. And the next topic that we're going to be talking about is what's the future going to look like for Bitcoin. And I think that this one here is where we're just going to, you know, take out our tinfoil hats

Starting point is 00:35:22 and put them on and act like we actually know what's going to happen here because this is like the biggest if ever. And Stig's going to go ahead and take this point. He's going to talk about this. Okay, so yeah, first of all, I think it's kind of funny that, you know, two, let's call us experts are going to predict what's going to have with a cryptocurrency that we have no clue about what's even, you know, a month ago when you haven't read this book, we had no clue what it was. And now we're going to predict the future. That's right. I love that. And what I think is going to be probably the best way for our audience to know what to do is just do the opposite of whatever we say. And you'll probably be right. I completely agree. Yeah, so the first thing I want to talk about, that's really trust. I think that the future of cryptocurrency and Bitcoin in particular, that really boils down to trust. And so if we take the example from before about Apple dollars, you know, I don't know if I trust Apple, you know, in particular, but I'm pretty sure that the $50 that have put up for this, you know, gift card, whatever it was, you know, I will get my money worth.

Starting point is 00:36:27 of that. And even if I don't, you know, I would be terribly sorry, but I think I can swing $50, right? So, you know, I'm willing to buy into different currencies, if you can say that Evel dollars is a currency, because it does not really matter if this system would fail or not. I think a lot of people, including myself, really perhaps don't trust Bitcoin, even though that they really dig more into what Bitcoin really is, that the money. might not really trust Bitcoin, not as the leading, leading currency. And I think that before Bitcoin will be a leading currency like the euro or a dollar, I think you will keep seeing this high volatility that you're experiencing.

Starting point is 00:37:12 So for instance, what Preston was saying before, you would see it increased tenfold, only to drop to a quarter of that value today. So having a system, having a monetary system, and the whole reason for a monetary system is really to ensure stability. at least that's a big reason for that. Having a system that is not completely stable, I think that would be really, really hard, and I think it would be really hard for people

Starting point is 00:37:36 but to trust that system. So it's kind of like, I think, you know, from a humanitarian point of view, I think it would be fantastic if we had Bitcoin, but before we trust it, we won't have a stable currency, and we won't have a stable currency before we trust it. So I think it's going to be really, really hard

Starting point is 00:37:55 to have Bitcoin really to be, a leading currency. I don't know if I'm just too skeptic. What do you say, Preston? Yeah, I think that whenever you look at something that has an enormous strength, there's always an enormous weakness that's actually attached

Starting point is 00:38:11 to that, tethered to that. And I think with Bitcoin, you know, a lot of people out there really like the idea that the government has no interaction or no control over the fact that these transactions are taking place. It's completely decentralized.

Starting point is 00:38:27 So you don't have to worry about a, you know, Ben Bernacki or somebody like that coming in and just adding a ton of new bitcoins if the market would go down or whatever. That's the advantage. That's the huge advantage that everybody likes. Now, the disadvantage that's associated that's basically tethered to that is the idea that you don't have some federal reserve that can come in here and rescue the economy if it would collapse if everyone would have started adopting Bitcoins. And so I think that that's kind of the bitter sweet piece of this. is that people like the fact that it's decentralized, but I think other people have total concern over the fact that it's decentralized

Starting point is 00:39:04 and you'd have no control, you'd have no government backing on the currency itself. So if some hacker would come in and would actually have the ability to hack this system and take it down, everyone would lose all their money. It's just that simple. And so that's a huge concern.

Starting point is 00:39:19 I mean, I don't think you could get a bigger concern that the whole thing could just collapse overnight. And I think that that trust barrier is going to be the biggest difficulty for people to overcome when dealing with this. And I think another concern, too, is, you know, if I had to explain this to my mother, okay, or my grandparents, would they, they would look at me like, I'm crazy. They'd be like, what in the world are you talking about?

Starting point is 00:39:45 That it's saved on a ledger and people are mining coins and, like, they would look at me like, I'm an alien. And so how are you going to get a large people to have trust in something that they cannot understand? I mean, you and I are having trouble understanding this, and we just read a whole 400-page book on it. So how is the person who's never read anything on this going to trust this or believe it? And I think that's one of the biggest hurdles that they've got to overcome is that piece of it. Yeah, another real thing that has a good point about saying what's really the strength is also the weakness.

Starting point is 00:40:15 Because you have a really strong niche community around Bitcoin. But I think having this decentralized currency, that would be really hard to make a leading currency because, as you said, there's no one to back it. We don't have anyone who profits from it, so we don't have a strong intermediary sector like the banking sector. And we don't have anyone to bag it like government or a federal reserve. So I think that if you want to go in that direction, you know, make it more, build some kind of profit margin into Bitcoin. I think, you know, a lot of people would leave it because that's really why they like it. But I think that if you don't have that, and as Preston said before, you only have five people really running this over which is like this.

Starting point is 00:40:56 central administration, you know, I don't think they, they can respond fast enough and efficient enough if there's ever any problems. So it's kind of like the whole trust and stability, you know, whatever comes first, but I really don't think any of the two things will come. I think that's really the challenge for Bitcoin. So I will say this. I think that that's the problem that they have is for people to adopt it and to start using it because they're not going to understand it. But I do think this. I think that they've got a very good source code, and I think that it's going to be very hard for somebody to hack it. Do I think somebody could hack it?

Starting point is 00:41:36 I don't necessarily know. I think it's pretty solid, to be honest with you. I would say it. I think it has a really strong chance of holding up. So I guess I'm optimistic on its ability to actually sustain itself into the future, just as long as computer power, you know, the processing power doesn't, you know, have some of it. extreme quantum leap that we're not expecting. I think that's the only thing that could really throw it off because then the encryption could be cracked.

Starting point is 00:42:03 But right now, the encryption is so hardcore. You're not going to crack it. So that's where I guess I see it. I guess I have trust in its ability to sustain itself into the near future in the next 10 years. But I think a lot of other people might not. So I see cryptocurrencies and the current Federal Reserve type system. coexisting.

Starting point is 00:42:28 I don't see Bitcoin basically making the dollar obsolete. I just don't see that happening. But I do see them working harmoniously with each other where I really think Bitcoin's going to be used in 10 or 20 years from now. I could see it being used, cryptocurrencies in general, being used exactly like gold, where it's a store of value that people go to whenever they're fearful or whenever the market, whenever they're thinking that inflation is going to occur or whatever. I think that it could be a source of protection for people to put their money into it.

Starting point is 00:43:03 Yeah. And another thing to consider is also the president and I be really, I don't want to speak on behalf of you, but at least I'm thinking in terms of, you know, the Western world. I'm thinking in terms of being a small business owner, being able to explain to my mom why she should buy Bitcoins, which I have no intention of doing. But, you know, so this is, you know, our point of view. I think that when you have a developing world where there are so many people who don't have access to a bank account, even though you see a lot of volatility, that might still be a lot safer and a lot better than just carrying around cash. So, to me, it's not a, well, it's not like it carry a lot of cash, but I have a bank account. I have a system that I trust.

Starting point is 00:43:45 I think that if you live in some rural area of the world, you don't have all that security. you know, the danger of having a hacker to hack your account, that's nothing compared to walking around with your net worth in your pocket. So I think in some developing countries, I think this might be a solution in the time to come. And I totally agree with you. A thousand percent. In fact, I think that Bitcoin is really going to get its start in emerging markets. I think that whenever you go to a country that really has serious currency issues, I think Bitcoin's going to be the solution. And it's just so easy. and we'll talk about this later to use.

Starting point is 00:44:22 And I think that here's another thing. I think that if a country would adopt Bitcoin is basically their currency, say you have a really poor country and their currency is just super corrupt, I could totally see Bitcoin emerge as the solution for the people within that country to start using it. And I think that you might see that slow adoption within third world countries around the world. And I think that's where this is going to get its start. Okay, so if this is truly going to catch you on, there's going to have to be people with a lot of money that throw some weight behind this.

Starting point is 00:44:55 And I think that's really kind of one of the critical variables is you've got to get the right mix of people. And I mean, imagine if a billionaire goes and drops $100 million into Bitcoin, that's going to have a huge impact just psychologically because what's this guy know? Why is he doing this? And I think that you're going to have people that piggyback on that. Not to mention, you'll have a larger market. on the currency itself. And so that's the one piece that Stig and I were kind of researching on our own was, okay, if this is really going to work, who out there is already doing it and why are they doing

Starting point is 00:45:27 it? So there's a couple of key people that we looked at. One of the biggest investors that we found out there were the Winklevoss twins. If you're not familiar with the Winklewoss twins, they were supposedly co-founders with Mark Zuckerberg of Facebook. They went through this big legal dispute because they went. to Harvard together. These gentlemen are actually Olympic rowers, which I found also very interesting.

Starting point is 00:45:53 But they went through this huge legal dispute, and they have put a ton of their money into Bitcoin. I know that they've invested around $10 million of their own money just by owning the cryptocurrency of Bitcoin itself. And then they're standing up their own stock exchange around Bitcoin. And they're also standing up another company relating to Bitcoin. So these guys are heavily invested in Bitcoin. The other person I want to talk about, who we always talk about, is Warren Buffett. What's his opinion on this? And so there was a really funny interview that I've got pulled up here, and I'm going to read it to you.

Starting point is 00:46:28 He was on Fox News, and Liz Clayman was the one interviewing him. And I'm going to read the exchange so you can kind of hear this. And this is really cool because it's Warren Buffett, it's Charlie Munger, and it's Bill Gates on their opinion of Bitcoin. So this was the question that was posed to these three gentlemen. We need to talk about Bitcoin in a minute. I can't wait to hear what Charlie Munger has to say about this. Let's bring in Charlie Munger, the vice chairman of Berkshire Hathaway. Bill's going to move over so you can come sit down.

Starting point is 00:46:58 Good morning, Charlie. And so Charlie says, good morning. I don't know if you've ever seen any of his videos, but he's, he is absolutely hilarious when he talks. I just laugh whenever I listen to him because he's just so, his sense of humor is so dry. and I guess I really like dry sense of humor. So anyway, so Liz Clayman says, I just had to get your thoughts on Bitcoin. This digital currency that's out there that people say,

Starting point is 00:47:23 oh, it might be the next big thing. What do you think, Charlie Munger? I think it's rat poison. Warren Buffett interrupts. He goes, put them down as undecided. And Liz Klayman says, do you understand what they're trying to do with it? Charlie says, no, but I regard it as deeply

Starting point is 00:47:42 flaky. And Liz Clayman says, deeply flaky. Okay, Bitcoin Bill, Bill Gates. What do you think? Bill Gates says, I think it's the technical tour de force. But that's an area where governments are going to maintain a dominant role. So that's Bill Gates's way of saying that he thinks that it's

Starting point is 00:48:02 revolutionary, but he thinks that he's a little concerned about what the government's role was going to be as they regulate it. And so then Liz says, Warren, what do you think? And so Warren says, I think either Charlie or Bill is right. And that was their exchange. So it was kind of a short, funny exchange. I thought that that would be pretty fun to read. But of course, Warren's always in the middle, you know, he's just, oh boy, the beacon of balance. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:51:52 Okay. So Warren Buffett, you heard Warren Buffett Charlie Munger. Bill Gates thinks that it has a lot of potential. He's very concerned. I've watched some other videos of Bill Gates talking about Bitcoin. And his big concern is really the government's role in it. So the people that I really am focusing on that I'm trying to really understand their opinions are these founders of PayPal because I think those guys understand this space better

Starting point is 00:52:16 than anybody out there because people might not realize this, but that's one of the things that PayPal was trying to do back in 2000. They were trying to create their own digital currency to basically make it a global currency around the world. They were not successful in doing that. So the people that I really want to focus a lot on are people like Reed Hoffman because he was a PayPal, one of the founders of PayPal. You got Peter Thiel, who's a billionaire now that we also pay very close attention to. We did one of his books in one of our earlier episodes.

Starting point is 00:52:49 And the other person is Elon Musk, who went on to do Tesla and SpaceX. He was also a PayPal. And these guys are called the PayPal Mafia, if you've never heard that before. So those are the gentlemen that I'm paying very close attention to when it comes to Bitcoin. And so Reid Hoffman, the founder of LinkedIn, he, I guess in the last couple months, made a purchase. It's probably pennies for him, the amount of money that he put into it. But I think it's around like the 40 million mark. Maybe it's hard for me to remember all the stuff that I was reading.

Starting point is 00:53:22 But I think he's dropped tens of millions into an investment of a company that would be basically like an, a wallet application for Bitcoin. And the stuff that I read on Elon Musk, I don't think that he has really invested much in it at all. And then the other person is Peter Thiel. And so we've got an audio clip that we're going to play for you from Peter Thiel, who's this billionaire who now owns Palantir. He is the original founder of PayPal.

Starting point is 00:53:50 And so he understands a space really well. And we're going to play an audio clip from him. Before we play that, I also want to highlight that Richard Branson owns some Bitcoins, how many. I mean, he might own one Bitcoin for all we know, but I'd imagine he owns a few since he's so wealthy. And then this gentleman named Patrick Byrne, who is the CEO and owner of Overstock.com, he is a huge proponent of Bitcoin. So he's another person if you want to do some research and look up what he's done. There's one other thing that I wanted to throw out before we play the audio

Starting point is 00:54:19 clip, and that was in January 2015, Silicon Valley put a bunch of money, $75 million into this company called Coinbase, which is another wallet application for Bitcoin. So if you wanted to buy Bitcoin and you wanted to store it in a digital wallet, Coinbase is probably the company that you'd go to right now that's located in the U.S. at least. So what we're going to do is we're going to go and we're going to play this audio clip of Peter Thiel. This came from probably about two months ago. I think he did this in January of 2015 that these were his opinions on Bitcoin. So we're going to play that for you now.

Starting point is 00:54:54 I mean, as you look back at PayPal, which is where you first sort of really came, you know, got a successful business out there that made a lot of money. I mean, we've now had this revived interest in Bitcoin and, you know, digital currencies and so forth, which I think all run up against the problem of, you know, will the state allow a private money system to exist? Do you think that PayPal could have evolved differently along those lines, or do you think that fundamentally, that could have been the equivalent of Uber for finance, and is Bitcoin going to do it this time around? Let's see. So I always think PayPal had these goals of creating a new currency. We failed at that.

Starting point is 00:55:38 We just created a new payment system. I think Bitcoin has succeeded on the level of a new currency. The payment system is somewhat lacking, so it's actually very hard to use. And that's probably the big challenge that. exists on the on the Bitcoin side. I would say um I would say that uh we're in with respect to finance we're generally in a more heavily regulated world than we were in 99 2000 when PayPal got started and so it might actually be very difficult to start PayPal today. I'm not even sure you could you could build PayPal today um because the regulations are are tougher and so there was sort of a

Starting point is 00:56:15 lot of this was in a somewhat gray zone in 99, 2000 um today uh it might be much harder to get started, much bigger barriers to entry. At the same time, you know, there's still a lot of people trying to do things in financial technology in one way or another challenges that it's a sector where you're having increasingly heavy regulatory headwinds, and that's a big worry. I mean, if you were to sort out the payment system around Bitcoin, I mean, do you think it could catch on in a way that would be seriously disruptive to existing fiat currencies? Hard to say.

Starting point is 00:56:52 You know, the fiat currencies, if you look at a dollar bill, it says, you know, this is legal tender for all debts, public and private. And the stress you have to always put is on the word public. And so as long as you have to have dollars to pay your taxes, if you don't have dollars to pay your taxes, people with guns will come after you and lock you up or do something bad to you. And so, you know, you can't use Bitcoin to pay taxes. You'll have to still convert it into dollars. And so on that level, it doesn't really threaten the supremacy of the dollar as a reserve currency, which is probably ultimately backed up by U.S. military power.

Starting point is 00:57:33 And what if a government somewhere, you know, maybe the Swiss or someone was to say, let's embrace an algorithmic digital currency and put the weight of the state behind it? Do you think that's what Bitcoin needs to take it to really catch on and be an effective currency? Well, it becomes a threat, let me put this way, it becomes a threat to fiat money at a point where Bitcoin is encrypted in such a robust way that the tax authorities can't break the encryption, can't tell how much money you have, what transactions you're doing, where it all becomes untraceable. And this was sort of a 90s, cypher anarchist vision of the future

Starting point is 00:58:15 where encryption technology would make it very hard for the tax authorities to break in. And it was like this defensive technology where the state could not get diminishing returns on violence and extracting revenues or tax revenues from its subjects. Now, this is not the way the computer revolution has really gone in the last. 17 years. So in the 90s, we were thought of the IT revolution as trending towards a decentralized world that empowered individuals. Today, it's again perceived as trending towards centralized databases, centralized servers, a more transparent world, a world in which privacy is always perceived to be somewhat threatened. And that's one where, again, you can only, Bitcoin only

Starting point is 00:59:06 works that only threatens if you can't trace any of the things you're doing with it. Okay, so you can see from Peter's comment there that he's not too concerned about the government piece of it with respect to Bitcoin being a threat to the dollar, which I totally agree with him. And I think that he brings up a really good point, that it could always just be converted into dollars in order to pay your taxes. And that's why I think the U.S. government, at least, would never have some issues. When you look at the news, there's a lot of countries out there that do have issues with

Starting point is 00:59:36 Bitcoin. You look at China. I know over in the UK, they were pretty restrictive on some things. I think Russia is pretty restrictive on it. And so it really depends on the government as you go around the world. But there's some governments that are more accepting of it than others. But I think in general terms, when you hear Peter talk about it, I think that there were some other spots in that interview that we didn't play where he talks about, I think the gentleman says, what do you think the probability of success is for Bitcoin at least? And I think he says somewhere around like 20% or something like that, 20 or 30%. So he, I think at this point in time, still sees it as a potential, but not a real high probability event that Bitcoin's going to really kind of take things by storm. That's, you know, that's his opinion. And I think that he holds probably more weight on that opinion than anybody else in the world just because of his background with PayPal, or at least that's how I'm treating it. So this comes to our final point in the show. should you invest in Bitcoin? And I think that's really the big question here. So Stig, let's get your opinion. No. Wow, that was way too short. You know, I think that my problem

Starting point is 01:00:53 with Bitcoin is that I don't know how to estimate the intrinsic value. It's sort of like I don't want to invest in dollars either because, you know, to me, the dollar doesn't really have intrinsic value. Well, it does in the sense that I know that I can get a given amount of groceries for $1 for instance. But it really doesn't make in a sense for me to buy as it doesn't produce anything. So it's really hard for me to say that today the price is $250, but the intrinsic value is $600. I mean, I don't know how to make that estimation. And I think that is really what's puzzled me. Perhaps if I knew more about the currency, you know, it might be easier for me to do that. And it might be a good investment for some.

Starting point is 01:01:38 It certainly has. But I think that is my main problem. That is, I don't know how to estimate the intrinsic value. So for me, I've got a little bit of a different opinion. For me, I guess every investment that I do, I look at the upside versus the downside. So the downside on Bitcoin is that it loses all of its value. Somebody hacks it or the government basically shuts it down and you lose pretty much everything in it. So the downside is huge.

Starting point is 01:02:01 The upside, whenever I look at it, I think the upside is also huge. When you look at it as a currency, a global currency, let's just say you have 1% adoption across the world on Bitcoin. If you added up all the different currencies around the world and Bitcoin would take up a 1% spot in that. That would put the value of one Bitcoin well over $1,000. Probably I would say at like, let's call it like 10,000 bucks is what I would think that a 1% mark would probably be. If it would take even more than 1%, then you're talking an even higher value. So for me, I see that there's a very high upper limit on the value of Bitcoin if you even have a small amount of adoption around the world. I guess for me, if I take a small position, a very small position in this, I don't necessarily see that as a bad thing.

Starting point is 01:02:53 If you have the ability to just straight up lose it, it's almost like casino odds, I think, are probably where you're at. Like, if you were going to play a roll out, your chances of winning are like 47%. So I kind of see Bitcoin in a very similar manner, but I think that the upside is very, very big. It's not like you're getting double your money. You could potentially get a thousand times your initial investment. And that's why it kind of piques my interest. Did I buy Bitcoin? Yes, I bought a few Bitcoins.

Starting point is 01:03:20 Do I recommend other people buying Bitcoins? Not really. I think that if you have the ability to just say, hey, I fully expect that. I could lose all this and it's not going to really make that much of a dent in my portfolio or I, you know, I'm going to enjoy just kind of doing this, then I think you should do it. But I think if you're relying on that money and you're really looking at that money for retirement purposes or whatever, this is probably not a sound investment for you. Yeah. So I just want to say two quick things. The first thing that is that you can actually buy an ETF that is tracking the price of Bitcoin. So if you are not up for a whole opening account and doing, You know, understanding this system, it's really easy just to buy an ECF, at least if you're a stock investor, you know how that system works. The other thing that is, do what you necessarily need to invest in Bitcoins to invest in Bitcoins. And I would say no.

Starting point is 01:04:14 You also have a chance to invest in the sector. So there was a lot of, you know, you can think of this like oil. Are you buying an oil company or are you just buying a barrel of oil? I mean, I think that's probably very similar. So I would say that, especially after listening to the thing about Silicon Valley and all the money that is putting money into the industry, you know, I don't know the sex that well, but I think there might be, you know, a way to profit from Bitcoins without Bitcoin's. Because I think that the whole technology is something that is worth considering. Whether or not intrinsic value is or value to undervalue, I think that's harder to understand. So I want to give you an example of something that a person told me whenever we were having a.

Starting point is 01:04:57 a discussion on this. And he was talking about back in 1849, there was an American gold rush out in California. And all these people were going out in the droves to California to try to find gold and to make it rich. And he said that the average person that went out there actually went bust and really never found any gold at all. But the people who made a ton of money were the people who were selling the pans and the shovels and all the gear that complimented the people to try to find the goal. And so Stig's point is a very good one. I think if you are interested in potentially investing in this area, I think a very safe play would maybe be doing something that would be an index for cryptocurrencies. Because one of my concerns is really, this is open source software.

Starting point is 01:05:42 So what's there to stop anybody from coming along and using the open source software to start their own coin and call it coin Z or whatever the coin might be called that would then compete with Bitcoin? And you actually have that happening right now. I think that there's hundreds of hundreds of cryptocurrencies out there. None of them are getting any kind of traction because I think they're having a hard time overcoming the branding of Bitcoin. Everyone knows Bitcoin because they've heard it in the news. So that's a hard obstacle to overcome at the present moment.

Starting point is 01:06:10 But that doesn't mean that some other form of a cryptocurrency could come along in three years from now and just all the money that's in Bitcoin gets basically pushed out of that and into this other cryptocurrency, then that one emerges and then you're out all your money. So I think that Stig has a very good point that if you are interested in investing this and you're a little hesitant to do the Bitcoin leap, which I think is a very good and sound decision if it's not money that you just feel like you can just throw away. I think that that's the best way you need to look. No, you, Preston. Like, no, that's definitely not me, I promise you. But I, you know, the reason I did it is because I was more interested in understanding the technology.

Starting point is 01:06:49 I wanted to see what it was like to buy something with Bitcoin. have my own wallet to just kind of conduct transactions. That's more of the reason why I did it than the investment side of it because I wanted to understand how easy it was, how there was no transaction costs. I wanted to just basically play with the toy, I guess, is the best way to describe it. That's what I was doing. But I am tracking this very closely because I think that there is huge upside potential. It's just a matter of when that's going to hit and when you're going to have critical mass where you have a lot of people adopting it and it takes off. So I think it's definitely worth watching, but something that you need to stand on the sidelines for. And I will say

Starting point is 01:07:31 this, since I have played around with the Coinbase account and used it a little, it is very easy to use. I was on my phone. I went up to a QRC, like a scanner code. I just scanned it with my smartphone. I said how much I was going to send. I hit the send button and boom, it was gone. It was that simple. And there was no transaction fee whatsoever. It was pretty, it was pretty amazing to be quite honest with you. So just fascinating technology, but a lot more to be shaken out on this type of technology in the coming years. And I think that it's something that people need to maybe look at a little bit closer and not just write off as being something that drug dealers and all these other people, which there's that whole side of the story that we didn't even talk about today.

Starting point is 01:08:13 It's called Silk Road. That's a whole other piece of this that has a real negative connotation to it. And I think that a reason a lot of people are just very weary of it all is because of stories like that. Yes. Yeah. And before people are thinking too much about what does drug dealers have to do with cryptocurrency? The thing is really that the strength about cryptocurrency or these Bitcoin is that you're anonymous. So that has a lot of good things to it. You don't need to be validated.

Starting point is 01:08:41 You don't need to be approved by a bank. But it also attracts, you know, sketchy people, for instance, like drug dealers, because you can't. be anonymous. So I think it's really hard to admit that side if you want to have a Bitcoin system that has all the advantages. I think that's pretty much just the price you have to pay if that is what you want to set up. Yeah, I would totally agree. All right, so we're at the point in the show where we're going to play a question from our audience. And so this question comes from Stas Plunkin, and here's this question. Hello, President Stig. My name is Stas. I'm from Frankfurt, Germany. Recently I read a book, Too Big to Fail by Andrew Sorking, and while reading I realized that

Starting point is 01:09:23 large market players like Goldman Sachs, large commercial banks, investment banks, as well as huge investors like Warren Buffett, they actually receive new and partly insider information straight away and actually do act on it. So my question for Gillen and you guys as well. Do you really believe that we average investors have a chance to be successful with investing in stocks and bonds? while we do not have the competitive adventures, the sharks, and professional players do. Thank you very much.

Starting point is 01:09:52 Yes, so Stas, I really like this question. And I'm going to start off my answer with a quote. And it's actually a quote from Warren Buffett. And what he's saying is that with enough insider information and a million dollars, you can go broke in a year. So I found that quote quite funny. Now, do Warren Buffett have some kind of inside information? Sure.

Starting point is 01:10:13 And what I think Warren Buffett really means for this quote is, that when he's talking about inside information, I think he's talking about people thinking that they know something that other people don't. And I actually think that's really dangerous approach to have. If you're thinking that you are

Starting point is 01:10:30 sitting with the knowledge about what a company will do, I think that you tend to overvalue that piece of information. I think that the 99.99% of the knowledge you need to acquire

Starting point is 01:10:45 that is already public. Then you might have some few rare situation where, which is illegal, by the way, you have people having insider knowledge about what a company will do, which will completely drag down the stock and like tomorrow if something terrible should happen then they have announcement about that.

Starting point is 01:11:04 But basically, I don't put too much personally, I don't put too much emphasis on that. I think that the minute you think you need to have inside information, the more knowledge than is public available, I think that you will probably read the information that is probably available the wrong way. You know, Toby Carlyleau had a point about this in his book where he talks about this double counting and how the market often moves in dramatic waves where one little piece of information comes out

Starting point is 01:11:33 and if it should have moved the stock up 1%, it moves it up 2 or 3% because everyone overreacted and they're polarized by the information. And so I totally agree with that. And I think that if you look at Warren Buffett's portfolio and whenever he made the large gains that he made, he never did it in a one month time frame. He never did it in a two month time frame. He did it over years of ownership because he saw something that was special in a company. He saw that the price was undervalued in general terms.

Starting point is 01:12:05 And he saw that the company had a competitive advantage that he knew was going to take them into a 10 or 20 year period. that was going to outperform other businesses. So when you look at Coke, when he made a large purchase of Coke back in the late 1980s, that was a decision because he felt like people were going to continue to drink soda into the future, that Coke had a brand that was a huge competitive advantage over any other person out there in that space. And it was at a great price whenever he bought it. That was the reason why he has been extremely successful as an investors, because he continued to hold that great stock for that long period of time after he got it for a great price.

Starting point is 01:12:42 that's why he was beating the market. And I don't think that that had anything to do with insider information or having a little known fact 10 minutes before the other person. Yeah. So Stash, you know, as a private investor, I can see why you would often think that say that Coca-Cola increased by 5% tomorrow, that you were thinking, wow, it would really be great if I bought in today and then sold tomorrow. But these investors, and especially Warren Buffett, they have so much money and they really

Starting point is 01:13:09 move their market. So as Preston is saying, you know, he's really in for the long run. He can't place a bet on coal increasing tomorrow even if he knew that because it really would make any difference with the kind of money he have. So basically, I would say, you know, in theory, yes, of course, it's nice to have insider knowledge. But in practice, I don't think it's that important to say not important at all. I think that that's a great question because I think a lot of people have that same opinion and they see it like, oh, well, there's no way I can win because, you know, I don't have

Starting point is 01:13:40 the same access to information that other people have. And I think that access to information is very important. Don't get me wrong. But I think at the end of the day, it really comes down to this fundamental elements when you're buying equity in a business is do they have a competitive advantage? Do they have a good stable income statement balance sheet? Is the company undervalued? Is it at a good price relative to all the other options that are available on the market? Those are the key factors that I think people need to pay close attention to. All right, staff. So we'll send you a free signed copy of the Warren Buffett Accounting book. And for anybody out there, if you go to Asktheinvestors.com and record your question, we will go ahead and send you a free sign copy of the

Starting point is 01:14:17 book if it gets played on the air. So Stas, thank you so much for sending that in. We really appreciate everybody in our audience for joining us each week. And if you're enjoying the show, make sure you go to iTunes and leave us a review because that really helps our show out and it helps us capture a larger audience. And we just really appreciate everything that everyone in our audience is doing for us. So with that said, we'll see you guys next week. And thanks for joining us. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com.

Starting point is 01:14:47 Submit your questions or request a guest appearance to the Investors Podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network. and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 030 : What in the World is Bitcoin? (Investing Podcast)

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