We Study Billionaires - The Investor’s Podcast Network - TIP185: The Bitcoin Debate (part 1) w/ Tuur Demeester & Erik Townsend (Investing Podcast)

Starting point is 00:00:00 You're listening to TIP. In 2017, we saw Bitcoin grow by over 1,300 percent. Ever since the start of the new year, however, things have been pretty ugly, with a year-to-date performance of negative 50 percent. So what in the world is happening? Is Bitcoin still the darling new asset class that so many people believe in, or is something more frightening on the horizon? Well, on today's show, we're going to have a little discussion that covers both sides

Starting point is 00:00:27 of the argument. In one corner, we have Turdemaste. TUR has been an investor in Bitcoin since the early days when one coin was only $5. Since his initial position, Bitcoin has grown by 132,000 percent. TUR has a huge following with over 159,000 people online because of his in-depth ideas and comments about cryptocurrencies. Then on the other side of the argument, the bare side of the argument, we have the talented Eric Townsend.

Starting point is 00:00:54 Eric is the host of the very popular investing podcast called Macro Voices. Eric got his start as a computer programmer and by the age of 17, he was already an independent software development and design consultant. Eric is an entrepreneur that has built successful tech companies and he's also the founder of his own global macro hedge fund. This is part one of a two-part episode. So whether you're a bull or a bear on the future of Bitcoin and cryptocurrencies, we hope you enjoy this thoughtful discussion from two very intelligent individuals.

Starting point is 00:01:25 You are listening to The Investors Podcast. where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, so I am really pumped to have Eric and TUR on the show. And before we start, guys, I want to embarrass you a little bit. So, Eric, I'm a huge fan of your show, and I haven't had an opportunity to tell you this, but I listen to your show all the time, and you guys have such a quality product. So this is really exciting for me to have you on.

Starting point is 00:02:05 the Investors podcast to be talking to you, and I really appreciate you taking time out of your day to be here. And also, Tur, I stalk you on Twitter. I'm just going to say it like it is. Like, I follow your Twitter very closely, probably closer than almost anybody else that I follow. So it's an honor to have you back on the show. I'm a huge fan. You're obviously brilliant in the crypto space. So very excited to have you here. Let's go ahead and dive right into this. Cryptocurrencies, they're built on top of an enabling technology that's called Destrances. ledger. So let's start there. Eric, in your opinion, how do you understand distributed ledger? Why do you think it's so important? I think it is super important, Preston. And the reason is,

Starting point is 00:02:48 and this is no exaggeration, since the beginning of time, a limitation that we've had in all information systems. And when I say beginning of time, I mean before computers, going back thousands of years, any information that you had, and let's use the ledger for a bank account as the example, had to be controlled by somebody. There was somebody in charge of that. And that meant that whoever that somebody was could be a bad guy. They could commit a fraud and they could steal money and do all sorts of bad things. Now, in the beginning, it was actually a ledger was written on a piece of paper and it was kept in a locked room someplace in a bank.

Starting point is 00:03:24 When we got mainframe computer systems in the 1960s, now it was on a transaction processing system on a mainframe. eventually it found its way onto distributed database technologies, more 80s, 90s kind of technology. That would solve a few problems in the sense that it would solve redundancy issues. If one computer failed, it would save a copy of it on another computer. There was a lot of enhancements to security in the 80s and 90s that protect us against outside bad guys, hackers and so forth. But if you've got an inside job, if the management of the bank is corrupt, they can control that data.

Starting point is 00:04:00 The idea that there's data somewhere in a network that no one person has authority over, that nobody can hack, that never existed, really, until Bitcoin's blockchain invented this idea of a distributed ledger. And the idea is basically that information is stored in a distributed network in a way where there is no one party that can control it. It is based on a system that uses consensus of a number of different actors in the network. And if it is properly implemented, it can truly be hackproof. Even the management of the bank can't hack its own system.

Starting point is 00:04:37 And that really is a huge improvement. So I think it is going to change the world in a big way. But the big, huge caveat that I put on this, and I liken blockchain, which is the distributed ledger underpinnings of the Bitcoin cryptocurrency, I think of it like the right flyer, the first airplane that ever flew, huge history-making thing. super duper important. It'll never be forgotten. But you go to the airport today, you don't see a lot of right flyers parked out on the tarmac. We've come a long way since then. The technology's gotten better, and there's no smart reason to go fly one of those things anymore. My contention is that because of some

Starting point is 00:05:13 specific design limitations, particularly something called proof of work, which we should come back to later, blockchain is designed in a very limited way that makes it not super duper scalable, not at all scalable, I would argue. So I liken it to the right flyer simply because it's super important in history. I think that the invention of the airplane was obviously important. The invention of the distributed ledger was important. The first airplane had some serious limitations. So does Bitcoin's blockchain. And I think that's where Turin and I probably disagree. Certainly blockchain is the only thing going that has achieved what blockchain has achieved. I think that other things are going to soon supplant it and that's going to cause real problems for the Bitcoin cryptocurrency.

Starting point is 00:06:00 This idea of mining particularly, you don't need that. There's better ways to do it. Let's hear Terse thoughts here. Specifically on distributed ledger, I'm kind of curious if you see it a little bit different than Eric. And then we'll dive into all these other things about the scaling and stuff a little bit later. Yeah, so let me try and take a stab at this. So I think it's important to understand some of the history. To me, what was first was Bitcoin. And then later, I noticed that people started isolating this idea of a ledger that's distributed and, you know, that became kind of the blockchain focus of almost an entire industry by now. So the initial project that was behind Bitcoin was this challenge. Like how do we find a way to create a private digital currency?

Starting point is 00:06:45 And one of the first things you run into, one of the first problems, is how do you prevent double spending? Because something that's digital obviously can be replicated. So if I have a balance of certain amount of tokens, then I should be able to just create copies. So how do you make something tamper evident or tamper resistant or even tamper proof? That, to me, is where it gets interesting. And Bitcoin has its own solution for that,

Starting point is 00:07:11 which we'll talk later about, is proof of work. But so in my view, a lot of the current approaches to these distributed ledgers, I worry that they may not be thinking enough about whether their approach really needs true decentralization. And if it does, I worry as well that there may be thinking enough about the real cost of true decentralization.

Starting point is 00:07:33 And that's what you need to get that immutability, temper resistance in your system, that censorship resistant. And when I talk about costs, like I always call a blockchain the world's worst database. It means that you store everything forever. That's what it is. You have a ledger that goes back to the Genesis moment, the very first transaction, all the way till today. So you really have to think hard, like, do I need that?

Starting point is 00:07:57 Or can I just use a MySQL database, a server client model? So that being said, I think it's possible that there are some benefits to federated proprietary blockchains. But at this point, they're a little bit unclear to me. Maybe it does offer higher auditability, accessibility, transparency. But I worry about what are those features really if the distributed ledger we're talking about is not fundamentally immutable or censorship resistant. Yeah, that's a very interesting argument you bring up there, Tor.

Starting point is 00:08:30 Do we really need to go through this energy expenditure and all the costs that's really wrapped around this tedious process of having a blockchain? Let's talk more about this proof-of-work concept. So the distributive letter is built up around proof of work. So, Eric, could you explain the concept to us? Well, let's go back first to how is it possible to decentralize, a ledger. The old system was that a central party, let's say the bank in the case of a bank ledger, was the owner of that data, and that meant they could do anything, but other people

Starting point is 00:09:02 were not allowed to tamper with it. If we want to make it so that even the owner or the originator of the data such as the bank is unable to tamper with it, the obvious answer is some kind of consensus-based model where different actors in the network have to agree to allow a transaction to go through. Well, if it's based on consensus, and that means that a majority of the different participants in the network could vote to overrule everybody else, if you think like Goldman Sachs, you just say, hey, let's buy more computers than anybody else, and we'll just be bigger in terms of how many network participants we are. We're going to create 200,000 Bitcoin mining players that appear to exist on the network when really it's just one guy who's behind it.

Starting point is 00:09:47 That's known in the computer security world as a Sibble attack, where you pretend to be thousands of different people in order to gain voting advantage in a consensus system. There has to be some way to thwart civil attacks to prevent them from taking over the network. Proof of work was originally invented as a deterrent for spam email. And the idea was to say, let me do some really complex math problem, which is going to consume a huge amount of computing resources on my side. I'm basically proving to you as the recipient of the email. I not only sent you this email, which a spammer might have been sending to a million people, but I went through a whole very expensive process to calculate the answer to this math

Starting point is 00:10:32 problem to prove to you that I really, really wanted to send you this email. I can't afford to do that math problem over a million times to send it to a million people. So you can trust that this email really is a one-to-one that's from me to you and not just junk mail that's being sent by a spammer. That's what proof of work was invented for. It's basically going through a very time-consuming and compute-intensive operation in order, essentially, when you think about it, to basically prove that you're willing to waste a whole bunch of electricity and computing resources. And it's really just to make it impossible for anybody to be able to afford enough computers to launch a Sibyl attack against the rest of the network.

Starting point is 00:11:18 Now, in blockchain, the way that transactions are validated is they have these kind of volunteer guys in the network that sign up to say, I'm willing to look at the transactions that are being processed through this system, make sure by checking the ledger that they're not double spending the same Bitcoin over again. And in exchange for doing that, I'm going to get paid in Bitcoin for helping to secure the network.

Starting point is 00:11:46 That process is called mining. What the miners have to do is compete with one another in order to put the next block into the blockchain. And the way they compete is essentially to say, through this proof of work algorithm, who is able to waste the most electricity and the most computing resources in the shortest amount of time to solve this complicated math problem to prove that they're not just one of thousands and thousands of guys that one person has put on the network, but that they're actually putting all of their computing resources behind this. It's really important for people to understand.

Starting point is 00:12:22 The high complexity, the high compute power that's required for miners is not because there's some super-duper secure encryption algorithm that makes Bitcoin safer. The process of encrypting the blockchain and making sure that all the transactions are legitimate. and that no bitcoins have been double spent, it really doesn't consume very much energy at all. What consumes a huge amount of energy is this arbitrary math problem that says, I am proving to the network that I've basically dedicated all the computers I can find to solving this arbitrary problem trying to beat everyone else. Now, that works fine in a proof of concept.

Starting point is 00:13:03 If you're in a laboratory, you've got five guys demonstrating this idea, it's no problem. When you try to scale that to a global payment system, you end up literally consuming more energy than entire countries use with everybody competing to put the next block on the blockchain. And blockchain's actually designed that the complexity of this arbitrary math problem gets harder. If more blocks are being put on the blockchain too quickly, they make the problem harder until it slows the network down. So this whole idea of proof of work is slowing the network down with arbitrary work that doesn't need to be done for any reason other than to deter against civil attacks. Well, the obvious question is, surely there must be a better way to guard against civil attacks to prevent bad guys from faking out the network and pretending to be a majority of the network participants when they're really just one bad guy. 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. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world.

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Starting point is 00:18:07 All right. Back to the show. All right, Ter. I'm really curious to hear your thoughts on a response to that. Yeah, that was so eloquent and well put, Eric. I always try to do this steel man strategy where you find the best argument of the other side. And I feel like you'd nailed it. It was a great presentation of, let's say, proof of work, skeptical argument.

Starting point is 00:18:28 There's a lot I agree with in how you technically explained the concept. So I'm not going to go over that. It's true that you prevent civil attacks by requiring work to be done. There's two words in particular that jumped out for me, and that is waste and arbitrary. So calling the proof of work mechanism wasteful depends on your perspective, right? If you look at where proof of work is used, and I want to stress that, like proof of work is not something that was conjured up or invented by brilliant as the concept in the digital world is, it's basically something that exists in nature and that's just reapplied in the digital world.

Starting point is 00:19:11 And nature is often known as the handicap principle where animals will develop features that seem wasteful for the outside observer, but then when you really look at it, it really serves a function. For example, the peacock has, you know, this very elaborate feather pattern, takes a lot of energy to produce. But what it does is that not only is it able to prove that it's a strong individual animal, but it's also a feature that is extremely hard to imitate from a predator's point of view. And you see that over and over where these features are actually security features that are present in these animal species.

Starting point is 00:19:47 Proof of work, you can also see it, for example, in the behavior of bees, where the queen bee is going to fly extremely high until only one male is a human male is able to follow her and that'll be the one that mates with her. So it's, you know, expending, you could call it wasting energy, but really it's spending energy to then convert it into something else. And usually that's security. By the way, gold, you could call gold as well a distributed ledger. So in that sense, I disagree with you that, you know, this is the first time in the history of the world that we've seen this. I would call gold a distributed ledger that's, it's unearthed by the expenditure of work. And the way gold is distributed in some ways is going to reflect how value is distributed.

Starting point is 00:20:30 It's a ledger to keep track of transactions and value in the world. Just to add to the idea that proof of work is wasteful and Bitcoin mining is wasteful, if people talk about mining consumes as much as an entire country, I've heard a recent estimate that said as much as the state of Massachusetts, keep in mind that miners can be installed pretty much anywhere on the planet. So what you see is that they go to, for example, the country of Georgia, they go to Iceland, they go to places like Washington State, where you have extremely cheap energy that nobody wants, and then they convert that into financial reliability.

Starting point is 00:21:07 That is what they do. Another way to look at proof of work is think about if you want to preserve a secret, right? Because that's basically what you do. If you want to protect information that's in the ledger, you want to preserve a secret. It's kind of like hiding a treasure. So one of the most successful ways that people have hidden treasure, in the past is to bury it very deep or to build a pyramid on top. And if you want to get hold of that treasure, the energy that you need to expend at the

Starting point is 00:21:34 bottom of the pyramid, like in the middle of it, is going to be proportional to the energy that was spent to constructing it in the first place. So that's another way to look at it. And then if you think about the alternative approaches that have been suggested, proof of stake in particular and other ones, they almost always boil down to some political construct where we try to reach consensus by some form of voting, and then you're going to penalize the people that are in charge. So I imagine if the Egyptians had come up with the political system to protect their mummies, I think the chance would be very low that we would still be able to see them in museums today.

Starting point is 00:22:12 So my answer to a lot of the proof of stake proposals, my suspicion is that it's kind of the equivalent of alchemy, where in the middle ages, people tried to create gold. They didn't want to have to dig it out of the ground because that cost so much energy. They wanted to find a shortcut and create gold out of other elements and never succeeded, of course. So I think that to try and bypass and try and spend a lot less energy to get the same in my security, I think that's going to be proven a fallacy. But of course, I'd love to be proven wrong and I'm open to see what the future is going to bring. All right. So blockchain's been around for almost a decade now. And there's some people that are like on Eric's side saying the proof of work has been criticized and TUR saying that you need proof of work for security. I'm kind of curious how you guys see this going forward. If there's going to be a new technology that emerges, whether there's something in the works that could potentially replace proof of work. I'm just kind of curious to hear your thoughts. So Eric, go ahead, take it away.

Starting point is 00:23:13 Yeah, I definitely think that this is the major breakthrough that we're waiting for. need to see and it is the distributed ledger system that is decentralized and is just as secure, if not more secure than the proof of work-based blockchain distributed ledger is. But it doesn't have minors. It doesn't rely on proof of work. It is orders of magnitude faster and more efficient because it relies on some other mechanism besides proof of work to assure that you don't have civil attacks and other vulnerable. the probabilities that security experts tend to look at. I absolutely believe that that's possible,

Starting point is 00:23:53 and I can't help but observe that the smartest Bitcoin guys, the trend right now is they're going off and working on other distributed ledgers, commercial products, which are not part of Bitcoin. They're trying to get rid of mining. They're trying to get rid of proof of work and find better ways to skin this cat. And I absolutely think that they are going to succeed and it's a matter of time. And, you know, I think a lot of what TUR said, you know, is it wasteful or not? Well, if your car breaks down and you're supposed to go on a date with a girl who lives eight miles away and you walk to her house instead, you're going to impress the girl. But I still would argue that you wasted a lot of energy doing that. I think that's really what proof of work is. It is

Starting point is 00:24:38 going to a huge amount of energy consumption to prove something that could be proven more effectively in other ways. So I think that it is going to be achieved. Now, there's a really important aspect of this to understand, which is how hard is it to do a decentralized ledger without proof of work? The answer to that question is if you truly mean completely decentralized in the Bitcoin definition of decentralized, where there is no central control whatsoever and it's totally peer-to-peer, Well, it's hard to achieve that. And I think we can all agree that it's hard to achieve it technologically. It gets much, much easier to get rid of proof of work and get rid of proof of mining if you have some degree of centralization.

Starting point is 00:25:26 So what if you said the goal was no longer to be completely decentralized, but we still want to make sure that no one actor in the network can hack the system. So the bank, if there's control fraud and everybody on the board of directors and management of the bank is dirty and they're trying to commit a crime, they can't do it because the system secures against it. But the network itself has some centralized components. Well, the Bitcoin crowd would say no way on anything centralized because the goal of Bitcoin is to make sure that it is impenetrable by governments. You can have the Bitcoin network and governments might not like it. They might try to outlaw it and it's going to keep working whether the government likes it or not. What if someone else said, you know what? My goal is not to usurp the power of government.

Starting point is 00:26:18 My goal is just to make sure the bank can't hack the system. I'm willing to accept a small degree of centralization just in terms of how this protocol works for figuring out who has a proof of stake or who has control the system. as long as no one actor can corrupt the data without the consensus of everybody else. The Bitcoin crowd would say, that's no good because as soon as there's any centralization, we're giving power to government. We don't want government to have power. Screw them.

Starting point is 00:26:45 That's the Bitcoin perspective. I personally happen to agree with that. I think it would be great to keep government out of our lives. That's my own view. I think a lot of other people are going to say, hey, if we don't focus on preventing governments from being able to control this thing, which unfortunately I think they're going to control anyway,

Starting point is 00:27:02 then we can solve this proof of work problem much more easily if we don't have to be truly decentralized in the most rigid definition of that term decentralized. So I think that's going to play a key in this is what do you mean by decentralized ledger? Do you mean that you decentralize it in the sense that the bank can't commit the control fraud? Or you fully decentralize it in the sense that no government could ever interfere with it, even if they had the legislative power that supposedly said they could? Those are very different questions. and I think that's an important distinction. Thank you, Eric. Very interesting questions indeed.

Starting point is 00:27:36 Tour? Yeah, so there's a lot to comment on. First of all, I think that we already have seen in the past 100 years a lot of experiments with how to improve upon central banking, people organizing it in committees, the federated systems. If you look at like ECB and then there's like supervisory organs and those kind of things, yet at the same time, you know, financial policy is, you know, as opaque as ever, money printing just keeps happening. So from a point of view of reliability, I would say there's, you know, there is improvement possible there. If you want a more gold-like asset as a currency, I think then you probably don't want to go with proof of stake.

Starting point is 00:28:16 So let me back up a little bit and just give my brief view on what proof of stake is. So the idea is that rather than letting anybody vote arbitrarily on what the state of the ledger is, you're going to say, well, if you can prove that you own a certain amount of tokens that represent a share of the money supply, then you get an accordingly large vote as to what is going to be the final version. So whenever there's a disagreement, we're going to vote based on the people that have the most money, basically. And of course there's criticisms that it's kind of like an oligopoly and things like that. I don't think those are the strongest. I think from a security point of view, it's very concerning because it's obviously optional to vote or not.

Starting point is 00:29:03 And so if only 10% of the money supply, for example, is staked. So it's used to vote. It means that 90% is floating around and is available for other people to borrow and then for a brief amount of times, launch a massive attack on the network. And something that's not often reported is that a proof of stake attack means that you can change the entire ledger. It's almost like a coup d'etat.

Starting point is 00:29:27 No matter what the constitution was, if you run in there and you gain control, you can go back and change even the very earliest transactions, which is not possible, or at least not as cheap in the proof of work world. So the big problem of proof of stake systems is who is going to guard the guardians? And you know, you can always say,

Starting point is 00:29:46 oh, no worries. We have all these systems in play. And then it's like, well, yeah, but what is the supervision? And then you basically get a bureaucratic system, which is very expensive. And my argument is then, well, aren't you just creating an obfuscated proof of work system where, yes, a lot of energy is spent to maintain security? And to the extent that you don't do it and you don't have all your checks and balances in place, you have huge vulnerabilities where, I mean, for example, you can say,

Starting point is 00:30:12 oh, well, you know, the stakeholders are very reliable. We can trust them. okay, well, what if somebody steals the private keys? All of a sudden, another actor has control over most of the network. Another argument I heard Eric say is that, you know, the smartest people in Bitcoin are moving to these alternative ledgers. I want to take issue with that. I have the past four years, for example, been looking around to see, and I'm trying to

Starting point is 00:30:36 say this in the most objective way of possible, you know, which developer of high pedigree is working on Ethereum, for example. And with high pedigree, I mean people who. who have significant, recognized performance in a domain other than Ethereum, right? Because Ethereum is kind of like self-reinforcing. Like you need some external standard. Like, have they have achievements in the area of cryptography of memory compression, which is a big issue in blockchain systems, building the internet, for example,

Starting point is 00:31:06 have they built components of the existing decentralized internet just to see, are there any skills that they're bringing along? And the answer was, it was basically cricket. It's like I didn't find anyone, and I'm still looking, I'm still open. And then compare that to Bitcoin, for example. And Bitcoin, you know, one of the earliest people who ran Bitcoin. The first person to run Bitcoin was Hal Finney. He was one of the earliest PGP developers.

Starting point is 00:31:29 He created the first reusable proof of fork system. Adam Beck, of course, works on Bitcoin, the inventor of the proof of work mechanism. He was credited in the Tor white paper. I mean, Tor, I think that's another example of a successful decentralized project. Nick Sable is the inventor of smart contract terminology, the digital gold concept. He recently presented research on improving Bitcoin network resilience. Alex Morkas, co-founder of Hudson River Trading, which is responsible for 5% of all stock trading in the U.S. is the largest sponsor of Bitcoin Core Development.

Starting point is 00:32:04 Christopher Allen, co-author of the HTTP standard used by 30% of web traffic globally. I mean, I could go on and on. So these are the kind of people that are working on Bitcoin-specific. That's the kind of pedigree that I would be looking for if I want to see a resilient system. Turer, I just want to ask you, Nick Sable always talks about security, security, and if you don't understand security, you don't understand Bitcoin. What does he mean by that? Well, I don't know if I can speak for him because I definitely don't want to put words in his mouth.

Starting point is 00:32:37 But I totally agree when he says that trusted third parties are security holes. And basically security, it's like it's the foundation of everything. have a ledger. If it's compromised in any way, then potentially billions or trillions of value is at risk. Like the Bitcoin blockchain, I don't know what the size is. I think it's smaller than five gigabytes. You know, it's just a file. It could be on anybody's desktop. So if you can find a way to hack into that and compromise it, it's the biggest of issues. And if you think about, you know, we want to build this future, this may be like decentralized internet. We want to unbundle financial services and kind of do it differently and give more autonomy to the user, well, the basis of that, the bottom layer,

Starting point is 00:33:19 the anchor is going to have to be security, right? If you want the public at large to entrust anything of economic significance onto this ledger, you better make sure it's pretty much unhackable. That's what comes up when I hear that. So, Eric, what's interesting is your argument saying that you don't need the proof of work to be fully distributed here. What I find interesting is your point was maybe it's just like quasi fully distributed. and you still get a lot of the security aspects with the proof of stake. But what I find interesting is what's happening in Bitcoin right now is you've got the lightning network that's being stood up.

Starting point is 00:33:55 And it's almost like a hybrid between what both of you guys are saying, but at the very foundational level, you still have proof of work. So I'm kind of curious whether you think that that still would work, if you think that that approach is kind of solving the scaling issue that you brought up earlier, or do you think that there's just going to be this alternate coin that's proof of stake and it's going to triumph over that model that the Bitcoin community is trying to use as their scaling solution? Well, I think a key to that answer actually goes back to what Tur said just a minute ago. So I want to come a little bit further back.

Starting point is 00:34:27 What Turr said before is, hey, the real heroes, the guys who seriously have credibility and credentials are working on Bitcoin. And I agree very strongly with what Tour said, but I'm going to put it in a slightly different perspective. The guys he's talking about are the proven heroes of the movement to use computers and encryption technology to protect us from the overreach of government. So people who design something like PGP, one of the first private security tools for encryption that allow people to keep the government out of your email so the NSA can't read your emails, as we all heard about from Ed Snowden. All of the heroes of protecting us from overrun. All of the heroes of protecting us from

Starting point is 00:35:12 overreach of government are working on Bitcoin. And I agree wholeheartedly that Bitcoin is where it's at in terms of the effort to insulate average people from overreach of government and allow them to control their own finances and keep the government out of it. The guys who are heroes in that space are all working on Bitcoin and I think they will continue working on Bitcoin. And I want to be clear too, I personally think that's great. And I hope that they win that the Bitcoin effort is successful at protecting us from overreach of government and changes the world. I think that's the best outcome and I therefore hope to be proven wrong on everything else I'm going to say for the rest of this interview. But unfortunately, if you don't have the agenda that

Starting point is 00:35:57 those guys have, if you're not worried about protecting us from overreach of government, if you just want a distributed electronic payment system, a digital currency system, which doesn't allow any one actor to hack the system, but it has some degree of centralization that governments still can oversee the system. It gets a lot easier technologically to overcome the requirement for proof of work if you're willing to accept that limitation. And unfortunately, what I think is going to happen is we'll get to is governments have more power than all of these guys that are so,

Starting point is 00:36:32 smart about inventing things like PGP. They can outlaw a first generation cryptocurrency like Bitcoin if they want to. And I think we'll eventually get to state-backed digital currencies that are going to have very different characteristics. We should probably save that for later on when we get to that point. Why don't we start with the Bitcoin currency first? Well, I've got a question for you, Eric. Do you feel like the longer that we have these other financial products like derivatives and

Starting point is 00:36:58 soon we're going to have ETFs that are stood up around the cryptocurrency? that makes it that much harder for governments to shut it down. I kind of feel like the longer that we go down this path and government doesn't step in, the harder it is for them to kind of ban it and outlaw. I'm kind of curious to hear your thoughts on that. I don't think so, unfortunately. I mean, to some extent, it's true that the more that you have these things, the harder it becomes for them.

Starting point is 00:37:22 But I think that the world is going to change in dramatic ways. And the big enabler is not so much, you know, is there any, F or not, it's when governments get their heads around what they could do using technology to advance their agenda, which I contend is going to be very opposite the Bitcoin agenda. I have said the future is not the Bitcoin currency. It's a different digital currency that I call the Orwell. And it has all the opposite features of Bitcoin. We haven't really gotten into the features of Bitcoin yet. But my view is that the government invents something that's opposite. They outlaw Bitcoin. And they go with what they want. And it doesn't

Starting point is 00:38:02 have all the same features of Bitcoin. And one of the aspects of not having true decentralization, it's a requirement of Bitcoin because Bitcoin needs to circumvent the ability of governments to control it. If you're not trying to achieve that, the technical challenges are much less. And it's going to be easier technologically to build that government-controlled network, then it's going to be to build a government immune network, which is what Bitcoin sets out to do. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business.

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Starting point is 00:41:56 So Bitcoin is built on top of the blockchain to distribute a ledger that we started out this interview talking about. And Tura, let me throw it over to you. So you're obviously a fan of Bitcoin and your long-term bull. Could you explain why? And let me just stress here a long-term ball on Bitcoin. We're not talking about. while having the next three or six or 12 months. Sure. So Bitcoin, really, in the essence, is a proof of energy spent. It's a protocol that converts electricity into financial reliability.

Starting point is 00:42:29 And, you know, it's a digital goal, really. That's what it does. Despite all the problems it has and the risks that are associated with it, I would say Bitcoin has done a damn good job the past nine years. The uptime, for example, of the Bitcoin network is higher than 99.992%. and that's higher than most all of the fiat currencies. The network has never been hacked, despite all the worries about Chinese miners being in control, to our knowledge, no code, and this is verifiable, no code from Chinese miners or other special interests have ever been inserted into the Bitcoin Protocol. So the financial policy of Bitcoin is pristine.

Starting point is 00:43:06 It's totally intact and predictable, and it will be for the next, you know, 50 years. It's true that Bitcoin, the main layer, Bitcoin is slow. It can only process seven to 15 transactions per second. But in my opinion, it's a fantastic first layer. It's a value anchor for a stack of protocols that will be built on top. And to me, that's the answer to all this confusion about is Bitcoin digital gold, is it digital cash, which one is it? My argument is that it's both.

Starting point is 00:43:35 It's just that you have different functionalities depending on where you are in the stack. So the Lightning Network, those Bitcoins, they're real Bitcoin that are circling there. They have different features. They're a lot faster. They have a little bit higher security risk than the Bitcoin's in the main chain. So the Lightning Network, a smart contract layer, it can process thousands of transactions per second. Also, it offers much better privacy, actually. And it's almost infinitely scalable.

Starting point is 00:44:01 So I think the Lindy effect is really at play here, where the longer something gains hold, the lower the chances are that it's going to go away. And to me, the real breakthrough is proof of work. And that's why also people call me a Bitcoin maximalist. Like I don't think we need 100 different blockchains that use proof of work. Because really, you're trying to convert electricity into financial reliability. You're going to have positive network effects. And so it's likely that Bitcoin is going to remain the most dominant currency.

Starting point is 00:44:31 And then in terms of government control, I see it as the BitTorrent of the financial world in the sense that, Just like BitTorrent, you can't shut it down. At some point, BitTorrent had almost 70% of web traffic. But what you can do is you try and build an alternative answer to it, maybe like an iTunes or something like that. And so I do things that governments are going to come up with their answer, whatever that might be, to Bitcoin. And I think so that's going to change the shape of the world.

Starting point is 00:44:58 We are going to have that tension going forward. Yeah, but if a government comes up with, let's say the U.S. government comes up with their own crypto coin that's the dollar at that point. The government still has complete control over the protocol. And so, like, if they want to adjust the monetary baseline, they can still adjust the monetary baseline. So, like, whenever I see these countries that are saying that they're going to do their their own crypto coin, I just kind of smiles like, well, isn't that's kind of missing the

Starting point is 00:45:25 whole point of all this? The whole point is that it's completely decentralized. So I'm assuming you agree with me, Tur. I'm curious to hear Eric's take on that idea. Unfortunately, I think it's even worse than you imagine because you're right that the goals of Bitcoin, which are to be totally decentralized and to prevent governments from doing things they shouldn't be doing, I think governments will look at this space and say, hey, wait a minute, we can engineer a totally different kind of digital currency that enables us to do things that we couldn't do previously.

Starting point is 00:45:58 they can't use substantially negative interest rates as a monetary policy tool in the current system because that encourages hoarding of cash. You get cash hoarding and it potentially creates a run on the entire fractional reserve banking system. But if you design a global replacement for the U.S. dollar as reserve currency, which is a digital currency designed by and for central bankers, it basically outlaws cash and it enables negative interest rates as a monetary policy. policy tool. So there's lots of things that they can do that give governments even more power to do the things that Bitcoin was designed to prevent them from doing. But it's a question of who's

Starting point is 00:46:40 in charge. And I think of this like a space race or an arms race. You know, if you see Bitcoin doing this, I think governments take the other side and say, wait a minute, how do we use all of these cool digital technologies that the Bitcoin crowd has thankfully showed us how to use what they've done a huge amount of innovation and pioneering work here. How do we turn this all around into something that advances government's interest rather than the interest of people who want to protect individuals from the overreach of government? And the answer is they can do a lot. There's so much that they can achieve with digital currency that they can't do with conventional currency system. How would you think through, let's say some of these large governments come out and they ban it and they make it illegal?

Starting point is 00:47:23 But then, I mean, how many countries are there in the world? Not all of them are going to take that same approach. So that means that Bitcoin might continue to exist in some of these smaller countries or even large companies that wouldn't ban it. Do you see that as a likely scenario that we're going to have some countries that won't ban it and still be using Bitcoin? Oh, I think that what's likely to happen is Bitcoin and other cryptocurrencies that we see today will be around and will be allowed to continue to exist on. until governments have an alternative. Why would you take on the political flack of shutting down Bitcoin until you have something to gain by saying our government-backed digital currency is the thing that we're going to use instead? So I think that first-generation cryptocurrencies, which is what I'm calling Bitcoin and Ethereum

Starting point is 00:48:13 and all the other things that are based on a blockchain, I see them continuing to exist. And eventually you get to the point where governments say, okay, what we need is a government-backed thing. We're going to decree that Bitcoin and Ethereum, these are the tools of terrorists. Ooh, scare everybody. Terrorism, bad.

Starting point is 00:48:32 We need to protect you the people from terrorism. So we're going to outlaw Bitcoin. And those few libertarians that you know who made so much money on it, we're going to punish them so you can get even with those people you felt jealous of for having bought Bitcoin before you heard of it. And we're going to have government-backed cryptocurrency that's failed. and safe and it prevents tax cheats and it prevents drug dealers and terrorists from using. Now, that's all a bunch of BS as far as I'm concerned, but I think it will sell very well.

Starting point is 00:49:01 And I think that it will enable governments to get away with taking over the crypto space with something designed by governments and the currency that I envision, I call it the Orwell. It's the opposite of Bitcoin. Every single transaction is traceable and controllable by government. Every single payment has to have the tax ID of both the payer and the payee. Every single transaction can be voided or clawed back by the government if they want to. It's the opposite, the antithesis of Bitcoin. And I'm not advocating this.

Starting point is 00:49:32 I think it's a horrible, horrible thing. I'm predicting a libertarian holocaust, and I hope that I'm wrong. But that's the way I see this going. So let me ask you this. And I see what you're describing playing out in some countries, but I don't see it playing out in every single country. And so let's just say I'm going to go through a scenario here. Let's say that I'm the Cayman Islands or that I can control what happens in the Cayman Islands.

Starting point is 00:49:56 And I say, hey, if you've got Bitcoin, we're Bitcoin friendly in this country. Now, I might be wrong about this, but I think if it would be banned or outlawed in whatever country, there has to be some type of grace period, especially as we got derivatives and all these other financial products. That's what we saw in China, where it was 30 days or whatever. this is all going down. I think if you had people that had substantial wealth in this stuff, guess where they're going? They're going to go to these countries that would facilitate this, and then the battle would begin at that point. Let me throw it over to Turd. Is that how you would

Starting point is 00:50:29 see something like this playing out, Tur, or do you see it completely different than what I'm describing or what Eric's describing? I just want to hear your thoughts. Yeah, first of all, I think the scenario that Eric is painting is very bleak. And if any attempts were to happen in that direction, I would see that as a bearish phase in an overall secular trend towards basically what technology has done for hundreds of years, which is to empower the individual. To me, civilization is creating order in a chaotic environment, and technology amplifies that. Like mobility is getting cheaper, safer, easier. So the things that you're describing of like, you know, some safe haven countries or

Starting point is 00:51:10 those effects should become pretty readily visible. And you already see that in Iceland, for example, where I think 5% of the electricity consumed in Iceland is not going to Bitcoin miners. So, you know, they're starting to get political clout in some countries. Information flows a lot cheaper and faster, so remote working is easier. Legacy systems are continually being disrupted where I really like this term by Fred Wilson from ABC. He talks about unbundling. So, for example, there was the television stations. There were maybe five stations.

Starting point is 00:51:41 And then now we have YouTube where. there's basically a million television stations. And so in the same sense, I think that, you know, medical care is being unbundled, financial services will be unbundled, energy production and storage, and so on. So that's the overall trend I'm seeing. And Bitcoin empowers the individual because, whereas in the past, if you were some kind of refugee, you had to hide maybe gold coins in your shoes or diamonds in your, you know, sue them in your coat. And now you can just remember a brain wallet. You can just remember a phrase. And that will give you access. of your funds no matter where you go.

Starting point is 00:52:15 And so I think that the fact that that is there, and especially if Bitcoin keeps growing. Because right now, I mean, let's be honest, Bitcoin is tiny. It's $150 billion. It's the money supply of the ruble. That's where Bitcoin is. So I think that it's going to have a disciplinary effect on the world,

Starting point is 00:52:30 just like BitTorrent had a disciplinary effect, where people were just fed up with paying $20 for a CD. So the industry changed. And now you pay, what is it, like $5 for almost unlimited music a month. So I'm an optimist. I do think there will be some backlash and there will be attempts to come up with an answer. But usually governments are not very good at creating appealing technology. And I think Bitcoin is really opening up this market for currencies where people are going to decide, like, do I want to use this currency?

Starting point is 00:53:02 It's an ICO. I don't really care if it's a government Fortune 500 company or a startup. I'm going to try and judge it by the technology rather than who's back in it. All right. So this is where we're going to stop the tape for this week. I hope you guys come back and join us for the second part discussion between Ter and Eric. As you can see, these guys are absolutely brilliant in their own right on both sides of the issue. Hopefully we're not confusing anybody with providing both sides of the argument. We just kind of feel like if you can hear two strong arguments on both sides, you can form your own opinion internally as to how you see this. And hopefully this conversation is really helping you, uh, termed that on your own. So we appreciate you guys listening in and we look forward to having you guys back next week. Thanks for listening to TIP. To access the show notes, courses, or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment

Starting point is 00:54:05 purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP185: The Bitcoin Debate (part 1) w/ Tuur Demeester & Erik Townsend (Investing Podcast)

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