Bitcoin

- This is the key line, this is a quote from CoinDaddy. - Right now all our entertainers come from outside crypto culture, not inside crypto. We've got to change that, he said. - Oh my God, what a mission to be on. - What a mission. (upbeat music) - Welcome to season eight, episode one of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle. - And I'm David Rosenthal and I am an angel investor and advisor to startups based in San Francisco. - And we are your hosts. After close to 150 episodes over the last five and a half years, this will be the first one covering something that is not a company. And while today's topic is nowhere near a corporation and is often thought of as quite the opposite, it has had a better investment return over the last decade than any company in the world, including Amazon, including Apple, including Domino's Pizza and even including Tesla. (laughing) - So great. We're gonna have to talk about a little bit of pizza as we get along here. We are, but not from Domino's. - No. - Today we are talking about the single greatest 10 year investment return in human history, Bitcoin. And in just over a decade, it has gone from less than one cent per Bitcoin to over $30,000, a three million X investment return. - That's just mind blowing. (laughing) - I was gonna say David, I don't know totally for sure that it's the single greatest decade investment return in human history, but it kinda has to be. - It has to be. - Obviously, I was looking at, so there's the NASPR's investment in Tencent and the Softbank and Yahoo investment in Alibaba. Both of those were like between 20 to 30 million that turned into like 100 to 200 billion. So even that's like, what a thousand X-ish. Like it doesn't even come close. - Yep, yep, pretty crazy. I have not computer the IRR, but I bet that's pretty good too. - Yeah. - So whether you are hodling on for dear life and riding it to the moon, or whether you think this whole thing is a crazy bubble that's about to pop, there is no denying the unbelievable cleverness of invention of all the math and mechanisms behind the Bitcoin protocol itself. It is truly a beautiful and ingenious system. But by who? We don't even really know who invented it. Today, David and I will dive into the complete history behind the creation of Bitcoin by the pseudonymous Satoshi Nakamoto, the different factions that pushed it to evolve through its several chapters since 2009 into the mainstream today. And we'll evaluate its position today with the same strategic lens we use on every episode here at Acquired. Is Bitcoin a new form of money? An investment opportunity? The start of a new global economy? Or just completely a scam? Today, we dive in. Well, if you love Acquired and you want to be a deeper part of what David and I do here, you should become an acquired limited partner. You'll get access to our library of over 50 interviews and deep dives on company-building topics, our monthly Zoom calls. And this is new. Live access to listen in while we record big events, like emergency pods, like the Slack one we did last month, a couple of months ago. Yeah, that's so great. And it feels like 10 years ago. That was back when Bitcoin was under $20,000. [LAUGHS] Yes, and also listen live into our book club discussions with the authors. Most importantly, though, and this is what's so cool about what the show has become, you'll be a part of the acquired community. We've been amazed at the caliber of people and insights that have showed up to our LP calls. It is so clear to David and I that we truly do have the greatest audience in the world from young people just starting out their careers to CEOs and top executives, some of which are running $100 billion companies and general partners at venture and investment firms of every size around the world. People have made friendships, gotten jobs, raised capital, launched new careers, and even met their co-founders through the acquired community. So if you aren't already an LP, click the link in the show notes or go to acquired.fm/lp and we can't wait to see you there. All right, listeners. Now is a great time to thank a new friend of the show that we are very excited about, Sierra. Yes, we are thrilled to be working with Brett, Clay, and the entire team over there. So why are we excited about Sierra? Well, one of the things that we've learned from making acquired over the years is that a great company is often defined by its customer experience. Yep, but being great is hard. Talking to customers is expensive. And while websites and apps are great, they're also kind of slow and clunky. And your customers have to learn them. They don't learn you. Sierra changes all that. They build customer-facing AI agents that can do an insane range of things, like finding the perfect home or picking TV shows or originating mortgages, shipping a sofa, returning shoes, authenticating patients for health care, ordering credit cards, saving subscribers from cancelling and on and on. In just two years since founding, they've become the leading conversational AI platform with hundreds of incredible companies, like ADT, Clear, Minted, Ramp, Redfin, Rocket Mortgage, SafeLite, Serious XM, and Wayfair. All trusting Sierra for their customer experiences. Sierra was built to be powerful enough for Fortune 500 companies, including heavily regulated industries like health care and financial services, but it really works great for any business, including yours. With Sierra, you can build your AI agent once and deploy it everywhere within weeks. On the phone and chat, SMS, WhatsApp, email, all in over 30 languages, you can even publish it to chat GPT. And with their unique and insanely aligned outcomes-based pricing model, you only pay for the value that Sierra delivers, increase customer satisfaction and resolution rates, lower costs, and higher revenue. Sierra enables the great companies of the world to show up at their best consistently every minute of every day, and in fact, we think so highly of Sierra that day, then, I even invested in the company. To find out how you can build better, more human customer experiences with AI, visit Sierra.ai/acquired, and tell them that Ben and David sent you. - Well, David, I think it is time to dive in, and listeners do know that, at various points in our lives past and present, David and I have bought Bitcoin, sold Bitcoin, hold Bitcoin. - Hottled Bitcoin. - None of this. Hottled Bitcoin. None of this, as usual, is investment advice. Don't take this as a recommendation to buy or not buy. In fact, I have learned way more researching in the last two weeks and really preparing for this episode that I ever knew when I held more Bitcoin than I currently hold now. So certainly not investment advice, but definitely a fascinating deep dive. And hopefully we'll both turn up some new stones that you didn't know, even if you're a Bitcoin enthusiast, and also help see the forest through the trees a little bit if you are someone that's deep on all this stuff. - I mean, when we were planning this season and thinking about the stories we wanted to tell, like there was no better story that I could think of to start this season than this though. - In fact, I thought you on it. So I'm glad you pushed it through. - All right, we're gonna set a new record on where we start on history and facts today. But it's not gonna be a record in the direction you think. We're gonna start two days ago on Monday, January 11th, 2021, when I paid my taxes to the US government. And I never really thought about it. It's what I do, go on the IRS website, I go on the California franchise tax board website and enter my bank account in furrow and pay the taxes. But this time, I found it very, very concerning. Like, I was, I mean, I'm dramatizing for effect here, but like I actually woke up in the middle of the night, Monday night, thinking about this. And I was like, I'm really worried about what I just did. - Why is that? - Why is that? Well, I'm not worried that I paid my taxes. I certainly believe in paying taxes. It's important, you should do it. I'm concerned how I paid my taxes. So when I logged onto these websites, the IRS website, the California franchise tax board website, they kind of feel like they were designed in 1995 and they probably were. And I went on, I was going through the flow. I entered my bank routing number and I entered my account number and I told them to take out many thousand dollars from my account and they just kind of did. They just sort of reached in to my account and they took the money, which I wanted them to. I wanted to pay my taxes, but that's insane. I didn't log on to my bank and tell them this was going to happen. I just gave out my account number and they came and they took the money. Now, I trust the government and I think that's okay. But I started thinking about all the times I do this. Right, like if they could do that, I mean, the routing number is just the branch. So like you and I could foreseeably have the same routing number. So all I need to do is either find or guess your account number, which is not very secret. No, like I actually give it to a lot of people in the more time. We spend on the internet and transact and we build a choir. Like we have our bank account it acquired. We have vendors, we have people who pay us. We're giving out our account number all of the time. There's really nothing to stop anybody. So once they have the number from sharing it, using it, taking money, doing kind of whatever they want with it, that's kind of frightening, isn't it? Totally. Like once you start pulling on that thread, it's almost scary to see where it goes and what the layers of our financial system are. I imagine that's where you're going with this. Yeah, that's exactly what I was like. Well, how else could I transfer money? I mean, I could write a check, but you write a check. That's a piece of paper that has the routing number. You're just making the problem worse. It has your name on it. It has your address on it. So literally everything you need to steal somebody's identity and their money is just right there printed on a piece of paper. What we also use, we use debit cards and credit cards to pay for anything. How many times have you had your credit card stolen been? Because I've had my credit card stolen like probably three or four times over the past 10 years. Yeah, something like that. Some of them, I'm sure everybody listening is probably in the same bucket. Like once if somebody knows your credit card number, and you don't even have to, like even if you're really careful with it, you could be paying at a gas station. There could be a skimmer installed at e-commerce website. You use could get hacked. It's out there. There's no way to stop anybody then from putting fraudulent charges on your account. But David, fortunately, these systems account for this. Like take a credit card company, for example, we did the Venmo episode. We talked about the credit system. Those companies make a ton of money building and transaction fees to account for all the fraud that they have to deal with because these systems are silly. You know, much like our social security number, where everybody's secure identity is what is it, a nine digit integer? Like yep, call it good. No one will guess that. Well, they are hard to guess. And of course, you know, we're dramatizing here. And there are these financial institutions that our banks, our credit card companies, et cetera, that are in the middle of all this. And they're monitoring our accounts. And they're looking for fraudulent transactions that show up and they're canceling them. They're not allowing them through. But like this is a huge tax on the system. So there was, in 2018, there was $28 billion of credit card fraud in the US. Plus, there are estimates there are another $50 to $60 billion in financial bank fraud, wire fraud, kind of generally more broadly. Not to mention chargebacks, which, you know, when merchants try and put a charge through on a credit card and the credit card company denies them, they're charged off, there's everything. There's all the work that all of these institutions they're doing to prevent fraud, all the technology, they're buying, all the people they employ. This is kind of a lot, right? Like, it's kind of crazy. So like, why does this happen? It happens because the account number is everything. There's only one address. It would be like, once that address is out there, you can access the account. It would be like, with our email, if I knew your email address and your email address, well, I could also just send email as you, right? Like, it doesn't kind of make any sense for the internet. Okay, so what if I told you there was another system out there, something that was natively designed for the internet that works just like email. You can give me your address. I can send you money, but not take yours. Nobody can charge back that transaction or invalidate it or claim that there's any fraud. Any of that. Does that sound interesting? Does it sound like it might be valuable? Tell me more, David. (laughs) Indeed, we will. All right, well, that was fun. We're going to get ahead of ourselves, for sure. Of course, we're talking about Bitcoin and of course, we're talking about the limitations of the traditional financial system, which to be clear is amazing and is one of the most incredible developments of human history, but it wasn't built for the internet. It was built for an age when, you know, the way that most people live their financial lives is once a week or more, maybe even once a day, they went to a building with somebody who called a bank with somebody who knew them there that they took out money out of their accounts and that person was like, "Yes, I know who you are. I can verify your identity. Yeah, I'll give you the money." That building, those people were processing checks that you were sending. They knew what was happening. It wasn't built for the internet. Right. And the most important thing for this system, the number one goal is that it keeps working. So you can see why it just keeps happening this way because it works. It is the foundational underpinning of our economy, democracy, the system must keep working. And sure, we've layered on all kinds of crazy hacks over the years to make it work the way it does, but I'm a fan of it continuing to operate the way that it does without breaking. So I see why it just keeps on keeping on. Yeah, exactly. So how do we get here? So modern banks started, now we'll go back to the history, started back in the 14th century during the Italian Renaissance to make great things happen. Here we go. I think it was the Renaissance when double entry, bookkeeping was created. I don't know for sure, but I think that was one of the main innovations of the financial system. Here I am shocked that you're not taking us to seashells for currency, but all right, let's just start with banks. That feels a reasonable enough place to start in this story. So that was when banks started. And they would take deposits. They would put out loans. They would do other services like money changing between regional currencies, transferring large sums of money, et cetera. Then in England, in the late 1600s, that's when banks started issuing paper bank notes, bank notes, so that people didn't have to carry around, whatever metal the currency was, denominated it, need a silver, gold, or seashells, or whatever. Turned out that was a pretty good idea. And when you say so that they don't have to carry around the gold or silver or whatever, the bank notes basically just say like, "I have this much gold, but it's at the bank." And here I'm just giving you a piece of paper that lets you know that I'm good for this gold. You can use this piece of paper. Now you're good for that gold. Yep, at the bank. And then pretty quickly governments got involved and they were like, "Oh, well, why don't we just keep the gold at our central bank and then all these other banks in our jurisdiction?" And they can put out paper bank notes, but it ultimately come back to us. Then we don't have all this metal going around great. By the way, that also allowed them to then inject money into the system and help finance their own spending as governments, but we'll get to all that later. So then from bank notes, it wasn't a big leap to checks, which the banks would create on special tamper-proof templates and paper that would then come back to the banks for verification. tamper-resistant paper. Yeah, tamper-resistant. And of course, there was fraud throughout all this. But again, like this is like, you know, a local town, a local city, everybody knows each other. All these pieces of paper coming back to the bank, they're verifying the system works pretty well. And then that grew up into clearing departments, it was clearing departments of banks that would clear these checks. And that got aggregated up into sort of local geographies and then ultimately countries of clearing houses. And then with the admin of computing in the 20th century, in 1959 in America, the automated clearing house or ACH system gets implemented. And that was a national system, is a national system that all of these payment wires and checks come to and they take batches of them every couple days. They process them automatically using computers. Also, imagine what a crazy cool system that would have been in 1959 that just because I have your bank information, I can send you money via the automated clearing house. And it will just show up three to five days later in your account, like magic. I mean, that three to five days without me doing, you know, writing a check, that's freaking awesome. It's amazing, it leads to things like direct deposit for employees from their employers transferring money between business to business enterprise applications. This is all great. But as you say, Ben, it still takes three to five days. This is a batch processing system that's grabbing a lot of transaction data and pieces of paper and pushing it out every few days. 25 years before the Macintosh, I will take it. 35 years after the Macintosh, maybe it's weird that it's still the system. Yeah, indeed. Also then, you know, for consumer use cases like that, like that's not going to work. You want to go out and eat at a restaurant. You're probably still carrying around your bank notes. Your green bucks in America or other paper currency in other countries. Well, so then people come up with the idea of like, "Well, how can we make that faster?" Credit cards, credit cards, started with a diners club was one of the first. Yeah. And then I didn't realize this till, till doing the research. Do you know where Visa started? So Visa was the first big credit card network? Is this the one there was a department store one? Was it Macy's or Sears? No, no. Maybe that was discovered. So Visa was actually Bank of America. Oh, they started it in Fresno, California. They picked one town and they just mailed all of their Bank of America customers in Fresno, California. These credit cards. Whoa. And people liked it. They started to dork. And then other banks wanted to get it on this action. They ultimately started a consortium of other banks with they called it Master Charge. That became MasterCard. And does he have Visa and MasterCard? But credit cards, as we all know, have a couple problems with them. One, it's debt. So the way that you can make payments happen really fast out in the wild is not actually do the payment. It's just on credit. So that leads to consumers that started using them. Many of them start racking up a lot of consumer debt. Also an enormous consumer, like CFPB problem in our country today, the consumer financial protection bureau, that this has been wildly abused. And many, many, many Americans are in credit card debt. Because frankly, the system has taken advantage of them. I do think, as you're pointing out, David, it is very counterintuitive to me. But it's crazy that it involved this way that credit cards came before debit cards, because we had ACH to literally move money around. But when we wanted instant payment, basically these stores or banks would just extend you the credit. And then they didn't have to move the money around right away. They could sort of do it later, which sort of explains before the debit rails were laid, which I'm sure you're about to get to, like how you could have these instant payments even before we had a debit system. Well, there was one other problem, though, with the credit system, which is for merchants, it's good in that they get to accept easy payments from lots of customers. They can probably do higher-value transactions without checks. They can get more volume coming through whatever they're doing, whether they're a restaurant or a retailer or whatever. But the problem is they don't get the money right away. So if you're a merchant, you're taking credit cards. Not only do you have to pay a fee to the credit card company. Is that a 2.9% plus 30 cents? Plus 30 cents, right? But also, you just don't get the money right away, because it's all on credit. You got to wait a month. So that's not great for your cash flows if you're struggling restaurant or retailer or the like. In fact, it's a little bit of a hostage situation. If the consumers weren't demanding, I must be able to pay in this way, because every other store is letting me. If you came to me, David, and you're the credit card company, and I've never heard of you before, and you're saying, by the way, you should start accepting the payments through me. I'll get it to you a month later, and I'll take a nice spiff along the way. I'd be like, get the hell out of here. Yeah. And that's why I think one of the reasons why it took 50 plus years to build up the network of credit card merchants and consumers in America, whether that's Visa or MasterCard or American Express and the like, because yeah, there's some good things here, but they're like, there's some really bad things to this system, too. Hmm. So then you mentioned, David, once the rails started getting laid for credit card transactions, and the early ones, I think, were super clergy. I think merchants had to call up the issuing banks of the cards. Like, there wasn't the automatic, you know, swipe an automatic phone system that checked everything, right? But as that started to get built up, then the debit rails got laid, and banks said, "Oh, okay, we can create check cards," that they were called initially. They came out in 1969, I think, in America. Hmm. And use some of these same technology rails, but have it be a debit system. So that's a little better. But I think it still is pretty slow. I think it's basically auto, I could be wrong on this, but I think it's basically just an automated version of, or a card version of, of ACH in the check system. Hmm. Okay, so all of this works fine for a long time. But then the internet really starts taking off, and as we chronicle so much on this show, and once the internet starts taking off, people start spending and doing, having financial relationships and financial transactions in so many more places than they used to. Mm-hmm. It's just, there's a lot more volume in the system than they used to be. And famously, you know, Paul Graham even put out a request for startups, was this in 2008, maybe 2007-2008, about, hey, accepting payments online is really hard. Somebody should do that. And of course, two brothers from MIT, the Stripe Kids found that, and they started Stripe and made it easy for businesses to take payments online. Which of course, is our modern infrastructure, companies, Stripe and companies like Stripe, you just have a, as the merchant, you just have a token, which is the notion of that customer's card, where if you pass that token to Stripe, Stripe says, yeah, I've got their card stored, so you never have to take on that risk of getting hacked or knowing the person's number, and the consumers are better off, because only Stripe actually knows your credit card number. But that certainly was not the case in the first 15 years of the internet. Totally. So, what happens is, like always, you've got these entrepreneurial attempts to make the system better and build on top of it, and Stripe being a great example, square being another great example, Venmo being another one as the internet is proliferating, people are building out essentially new layers of infrastructure on top of this old, you know, traditional financial and banking system. At the same time, you also had, over the first 20 years or so, of the internet, a couple attempts to start to design some new protocols from scratch for digital money. So, these were companies and projects that you've probably never heard of, like Digicash, which was a company, I think started in like 1996. Egold was one of them, bit gold was one, which got pretty close. And then actually in China, this is a really interesting Tencent, had QQ coins, which were part of the QQ network, the pre-witch at part of Tencent, and they became so valuable that people started transacting lots of things in QQ coins in China. This CCP didn't really like that, so they started regulating that pretty heavily because it was becoming too popular. But of course, the other big attempt to solve all of this financial and money problem on the internet, of course, was PayPal. And PayPal was really interesting, and they kind of almost did it. So with the whole vision of PayPal, you know, Elon's vision, Peter Tiel's vision, going back to the beginning, was to create internet and native digital money. And they did, and they found the killer use case on eBay with beanie babies and other things happening. But the problem with PayPal was they did it as a centralized system. So they-- And of course, it's still denominated in US dollars. Like, sure, I can pay through it. And that really is the problem you're describing here that you're trying to solve. How do you take payments on the internet? But certainly, you know, when we compare it to me, like Bitcoin, that is a completely different, complete monetary system, what PayPal was doing was a much thinner slice. Yeah, much thinner slice. Well, and also, they ran into the problem of they were like a bank taking care of all of these transactions happening. There was so much fraud. Like, one of the biggest challenges for PayPal was managing the fraud and actually, Palantir, as lots of listeners may know, grew out of the fraud prevention technologies that they developed at PayPal. But it was up to them. You know, whenever there were the equivalent of chargebacks or accusations of fraud, they had to mediate all of these transactions and decide what was what and reverse some of them and make sure everything was operating okay. So, like, it was, the rails were better for the internet, but they still had this problem that it wasn't very efficient. Because it's built on all the previous layers of this monetary system where fraud can exist because our current means of securing accounts and transmitting money and, you know, even the money itself. Like, it's not, it doesn't lend itself to security. It lend itself to vulnerability. And then we've built up all these ways that it can be secured, which, of course, are expensive to maintain. Yep, totally. And it was, it was, ultimately, it was just a digital version of the same model of the traditional finance and banking system. Okay. So then we get to 2008. And for so many reasons that we talk about so many episodes on this show, that was the seminal year. And really, in this case, I think it's two things. It is, of course, the financial crisis. It's Lehman going bankrupt and massive, not only loss of trust in traditional banking systems, but also just financial hardship and ruin for so many people that cause them to go want to seek other opportunities. In addition to just this massive, exponentially growing complexity of payments on the internet, that is like a whack-a-mole that people are trying to stay ahead of. It's so funny. When you say payments on the internet, it's like two completely different archaic stacks that now need to interact. Like for all the credit, we give the modernity of the internet. It's an insane system. The protocols that are used to underpin the internet. They've evolved a lot over the years. And especially the fact that a couple of years ago, we sort of wholesale switched to HTTPS from HTTP. But like, you've got UDP and you've got SMTP to send email. And you've got all these protocols that like, people have sort of stitched together. And then of course, you've a browser that sits on top of it all. And there's the World Wide Web that sits on top of HTTP. So there's like all these different kind of Clujee kind of archaic technologies now including JavaScript, which for some reason runs everything that by some miracle duct tape together correctly created the internet, which is amazing. And that's this entire separate other stack on top of the problematic monetary stack that we've already talked about. So like when you say payments on the internet, it's like I hear like complex ball of yarn with a different complex ball of yarn that need to somehow fit together. And obviously we're making it work. But boy, is it nasty on either side? Totally. And this is why something like Stripe, you know, people didn't think it could be done. Like it was so hard to make all of this work. Okay. So 2008, on August 18th, 2008, a domain name is registered under the name Satoshi Nakamoto for Bitcoin.org. Okay. Nobody really notices this happening. Then on September 15th, 2008, of course, Lehman Brothers goes bankrupt. Remember that day. Well, I will never forget that day. Working on Wall Street at the time. And then on October 31st on Halloween. So like six weeks after Lehman, going bankrupt, a count with the name of Satoshi Nakamoto, publishes a paper on the cryptography mailing list metstow.org, describing a new digital cryptocurrency titled Bitcoin, a peer-to-peer electronic cash system. And this is why I started where I did with history and facts. I think so many people when they start explaining Bitcoin or trying to understand Bitcoin, they immediately talk about like, well, this is an alternative currency. And the federal reserve system, and fractional reserve system is broken and inflation. And this is better. And yeah, that may be true. We'll get into all of that. But the actual original intent of this was to design a native payment and currency system for the internet that didn't have all these problems. Yeah, it's so interesting. Like literally a couple of hours before we record to put the icing on the cake of my research, I reread the Satoshi paper. And it is amazing how in the several introductory paragraphs, which by the way, the whole paper is crazy succinct. Nine pages, including its references and sources cited. It's mostly talking about hey, because the system for transmitting money is relatively insecure and requires central authorities to verify everything, you know, either the federal reserve bank or banks in general or whatever it is, we basically have this big tax on the system that you could have fraud. That you could need to reverse charges because they were made by someone who didn't actually have the money or they weren't who they said they were. So the whole system carries this big tax. And what I'm proposing here is a way to pay for things that basically is a system that exists completely outside that system and is fundamentally better because it doesn't require those taxes. Everything is verifiable and authentic. So here's how the white paper starts. Commerce on the internet has come to rely almost exclusively on financial institutions, serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model. Completely non-reversible transactions are not really possible. Think about chargebacks on credit cards all the time, like this is a huge issue that so many internet companies deal with. Completely non-reversible transactions are not really possible since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs with the possibility of reversal the need for trust. Spreads merchants must be wary of their customers hassling them for more information than they would otherwise need and a certain percentage of fraud is accepted as unavoidable. This is what they're talking about. Okay, so hopefully you can see why an alternative system would be really interesting and important. Yeah, and it's so interesting that this paper isn't about we need a different asset class that is immune from inflation or at least more resilient to inflation or we need decentralization because governments putting too much faith in governments. Like none of that is actually in the paper. All of that is sort of derivative, byproduct, and lore that has sort of developed around this initial problem of a peer-to-peer, no centralized third-party trustless system for transactions at low cost. Yeah, and to be clear, whoever Satoshi Nakamoto was, is people think it probably isn't just one person. It was a group of people. And the early people who start getting involved in Bitcoin, they believe everything you just said. They tend to be pretty libertarian-minded folks. But that wasn't the purpose of why they came together. So I mentioned Digicash, Egold, Bickgold, previous kind of attempts at this, kind of half of the problem was solved. So this idea, the crazy underpinning of the traditional financial system that there's one account number, and if you know that account number, which you have to give out to people to transact, you're compromised. That had been fixed through email and other technologies on the internet. Encryption was the username, password, combinations. The idea that you could have a public address, like an email address that anyone can transact with, but you retain a private key effectively to access that that was already baked. That was trivial by the time Nakamoto came along and published the Bitcoin white paper. Totally, totally. And this notion of public key encryption that you're talking about, David, absolutely one of the greatest inventions in human history. I mean, if you think about like ciphers from pre-World War I era in war, like you would have the same key to encrypt and decrypt. And you know, that that notion is great if you can securely transmit that key to another person and trust that they're going to keep it secret. But the brilliant idea behind, I have a key that only I can use to send email as me, but there's a way that you can send email to me or apply to another context. You can send me money or you can encrypt a message that only my private key can decrypt. So you can sort of publish it in the whole world and say, here's an encrypted message that anyone could read if they had the private key. It means that only the person who the message is really intended for even if the message is intercepted is the person who can read it. Yeah, so okay, so what's the problem? Well, the problem is think back to email. If I send you an email, you can copy that email. You can forward that email. I can copy other people on that email. Great for email, bad for money. I don't want you to be able to send me $100, but then also copy someone else on that $100 and essentially double spend the money or triple spend or a thousand times spend. And this was the problem that nobody had a good way to solve. And this is what was just so revolutionary about Bitcoin and Nakamoto's solution. Yeah, I mean, zooming out for a second, the big idea in software, think back Windows 95 was creating infinite replication, creating abundance. Microsoft prints a copy of Windows 95 for basically zero marginal costs. They put it in the box. There's of course distribution costs. But cloning the bits over and over and over again made this incredible business model. Then the internet rolls around. And then suddenly you've got zero cost distribution, which compounds the abundance from the zero cost replication of software. So now you have, it doesn't cost you anything to make a copy and it doesn't cost you anything to deliver it. So think about that. Like everything that we sort of know to be true up to this point is that if something's digital, it can basically be copied and everywhere quickly. And the big idea, which is completely genius and previously thought to be impossible before Bitcoin is creating scarcity with software on the internet. Absent the fact that now we know Bitcoin is a thing, it would have sounded ludicrous if not then elegantly laid out in this nine-page paper of here's how we're going to do it. Yep. Okay. So how do you do that? Well, the solution that Satoshi proposes is a, quote, "peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions." Well, why is chronological order important? Go back to the, I'm emailing you $100 and I'm copying somebody else on that transaction example. Whoever gets the $100 first, then the next transaction is void. Like if I were trying to give somebody a paper $100 bill, well, the first person who gets it, they've got it. Yep. And of course the way that this actually works, we talked about public key encryption is when I'm sending it to you, I sign it with my private key. Like I take that Bitcoin, which is a hash that has all the other signatures that came before it, sort of in there. And I know that's not technically exactly right, but that's the reasonable way to think about it. And I sign it with my private key. I send it and so anybody else out there, if they wanted to sign something from my wallet or that I sort of owned, they couldn't. They only have my public key. I'm the only one who can sign it and send it to someone else. Now, of course, that someone else can verify that I send it to them because they have my public key. So they can quickly do some work and see and sort of check the work and say, yep, that did come from you. And now it's, but they don't need to know my private key in order to do that check. Yep, okay. So if this system were to exist, all these transactions, thousands of them, millions of them, billions of them, would be going out into the network. How do you keep track of which ones are the valid, correct, unique scarce ones? The way that Satoshi proposes you do this is you have a distributed system of the ledger. So everybody can see the entire chain of transactions of every transaction that has ever happened within the system. Yeah, David, I think that's a really interesting concept and a little counterintuitive where he's basically saying, well, in a third party system like where you kind of have a mint or the federal reserve, you send that information to them and they keep track of it. That's the only way to make sure that one is not getting double spent. And he's saying, well, what if you've flipped that on his head and he, they, she, whoever it is, and saying, well, what if everybody has a copy of the ledger and everybody just has the complete transaction history of every single Bitcoin right there on their computer? That's my proposed solution. Yep. And so if you're doing that, then he proposes that people who would choose to, who are part of the network, they could grab these transactions that are being broadcast out and they could generate computational proof of which ones came first, which ones were the right ones if somebody's trying to send a Bitcoin multiple times, which ones of those happened first and are the correct transactions that should be added to this ledger? Right, he's basically saying there's a, there's a whole set of people out there who, you know, have decided they want to host, you know, on their computer the entire transaction history and they're going to do some work to verify. They're going to go back through and they're going to say, I'm going to do some math to do some checks and basically say, hey, are all these transactions valid? And then, you know, they're going to run their computers to kind of do that and make sure, basically verify the integrity of all these transactions. And, you know, if they verify and say, yep, this is good, they're going to propagate it out to more computers and more people who are on the network so that essentially there's like one canonical version around there that everybody's sort of copying off of that has a bunch of thumbs up on it. Say, yep, I've checked this, it's good. Yep. Okay, so how do you design this system? So it's not just total chaos of everyone doing this. You make it computationally actually pretty hard to prove that you have the correct order of transactions. Okay, cool. That means that once one of these super users, one of these nodes broadcasts out a set of transactions, everybody can be pretty reasonably assured that it's correct to, though, because you chain these transactions together into one ledger that goes all the way back to the beginning, if you make it hard to compute each block, you make it impossible for anybody else to then change that ledger. Because the block is cryptographically changed to the previous block, that's hard to do. It takes, and the system adapts so that it always takes on average about 10 minutes for everybody, all the miners out there that are working on these transactions, which is more computing power than you can imagine right now. It still takes 10 minutes to create one of these blocks. Now, to go back and change and fake some of the previous transactions, you would have to recompute the entire chain all the way back to the beginning. It becomes an exponential problem. Not only, if you could do this, not only would you have to broadcast it out to a material part of the network and not just have it on your own machine, but tell it your friends and have them tell their friends and all that, it's exponentially difficult to take the hard thing to do in the first place, which is go through a block and basically find the new block. But then it's also exponentially hard to go and rewrite every block that then is stacked on top of that one. - Right, so when you set up the system, say for the first week or month or depending on how many people are using it, even a year or two, it's not so hard. Like if somebody wanted to come in with a lot more computing power than other minors on the system, they could recreate all the transaction hashes back to the beginning, insert their own fake transactions, give themselves, you know, a hundred thousand Bitcoin and then pass it off as the new one. - If you had an M1 MacBook Pro and the old-- - You could go back to 20, 20. - Right, and there was like only a handful of other crappy laptops doing this, you know, in the early days, then you, sure, your compute power would out muscle a lot of these early ones. But that's not gonna happen as soon as it reaches sufficient scale. - Well, this is what's so cool. It becomes a network effect economy because the more transactions that are happening and the more blocks that get created and the more computing power that's working on that block, the harder and harder and harder it becomes to forge it till you get to a point, you know, where we are now, like you would need the total amount of computing power that has gone into Bitcoin since the beginning, plus some more to break it. And that's just not possible. Like there's no way at this point because it's been operating for so long with so many nodes on the network, so many transactions happening, so many miners mining, it's impossible. And so now you can guarantee, this is what Satoshi saw, if you could get to this kind of network with this density and scale and operating history, it would be impossible to crack it. And then all of the fraud, all of the double counting, all of the costs on the system that we just talked about with the traditional financial system wouldn't apply anymore. - Yeah, it's interesting. So what we're kind of talking about here is laying the groundwork for basically a system of accounts where you can be super sure that if you're sent money that it's legit, that there's not a risk that they didn't actually have that money and you're gonna have to do some kind of charge back. And you know it's legit because you've got all this, everything we just described going into saying that hey, if I receive this Bitcoin to my address, it's not gonna get undone, or it's at least extremely unlikely that it's gonna get undone because of all this work that's going into it. We did, we jumped to use the word miner, and I wanna explain how that fits into the context of what we were talking about about five minutes ago. So we were saying that there's these people who have a whole copy of the blockchain of basically the entire transaction ledger leading up to now, sitting on their computer, and they're doing work. They're going through and running cryptographic algorithms to basically ensure the authenticity of all those transactions and check and make sure that, yep, these are all correct. Well, of course they need to be compensated for that because they're taking electricity, they're running their machines, the fans are on real high, in all likelihood, they're GPUs, and now even more specialized mining hardware that exists in a data center somewhere close to a river so they can have easy access to cheap renewable energy. - Yeah, maybe back in 2009, researchers like Nakamoto and the people that he shared this with originally would have done this out of the goodness of their hearts 'cause it's cool, but that's not gonna scale. - Yeah, so what was initially sort of a byproduct and is now sort of the incentive of mining one of these blocks is the first coin on the block gets given to you as a thank you for doing the work to verify the integrity here. And without getting too far into the specifics of how that actually works, what it basically means is you're getting paid for your labor or you're getting paid at least for the energy that you're putting into helping the system remain verifiable and authentic. - And it's not just the first coin, it's the first several coins on a block. So it started with 50, so if you mind a block, which again happened every 10 minutes, you got 50 bitcoins in the beginning. Now I think it's down to six and a quarter. - Six and a quarter, yeah, 'cause it halves every time, which of course we will talk about how Bitcoin is not an inflationary currency, but it has a finite number. It's slightly under 21 million will ever get mined and it uses sort of a having function so that every four years, I think the reward gets cut in half. So there is only a certain amount of Bitcoin that will ever be mined. So you can count on the sort of system not getting watered down by injecting more and more Bitcoin into it above this very predictable, regular declining schedule that we have sort of observed. - What you were saying, Ben, is so important. Like we just described the super cool system, it'd be awesome, it'd make money on the internet, work much better, it's gonna require so much compute power. Why would anybody do that? Why would these coins have any value? They're not dollars, they're not backed by a government. The reason is what you were just saying, the coins get created by doing the work to make the system what it is, which is really, really good. So the value is in the work itself, it's a recursive system. - Right, and what you have from the work being done is a system of integrity and the network effect may be small to start, but you can count on the fact that you can be very certain that all of those transactions have been combed through. And while technically there's no chart of accounts, you sort of figure out who has one and every account by running through the whole transaction history and figuring out where all the chips fall down when you sort of run through line by line by line. But effectively what you have is a big chart of accounts where you know for damn sure that those are right. Those accounts actually contain those Bitcoin. - So if you own a Bitcoin, and the first people who own that Bitcoin are when it's created, are the people who mind it, and then it gets transacted, and you own some, I own some people who buy and invest, what you actually own is you own a piece of the computing power that has gone into making this system robust and secure and viable and good for everyone. - All right, listeners, this is a great time to think one of our favorite companies here at acquired. Century, that's SEMTRY like someone's standing guard. - Yes, Century helps developers debug errors and latency issues pretty much any software problem and fix them before users get mad. As their homepage puts it, they are considered not bad by over four million software developers. - Today we are talking about the way Century works with another company in the acquired universe, Anthropic. Anthropic used to have some older infrastructure monitoring in place, but at their massive scale and complexity, they instead adopted Century to help them fix issues faster. - Yep, crashes can be a massive problem in AI. If you're running a huge compute job like training a model and one node fails, it can affect hundreds or thousands of servers. Century helped them detect bad hardware so they could quickly reject it before causing a cascading problem. Century also enabled them to debug massive issues in hours instead of days, so they could get back to their training runs. - And today, Anthropic relies on Century to track exceptions, assign errors, and analyze failures in real time across all of the primary languages used by Anthropic's research teams, including Python, Rust, and C++. According to the Anthropic team, Century gives our developers one place that will have all the information they need to debug an issue. - And speaking of AI, Century now has an AI debugger called SEAR. SEAR is an AI agent that taps into all the issue context from Century and your code base to not just guess, but root cause gnarly issues and propose merge ready fixes specific to your application. - We're pumped to be working with Century. They have an incredible customer list, including not only Anthropic, but cursor for cell linear and more. If you want to fix your broken code fast, like over 150,000 other organizations that use Century from IndieHobbius to some of the biggest companies in the world, you can check out century.io/acquired. That's s-e-n-t-r-y.io/acquired, and just tell them that Ben and David sent you. - Yes, and they're offering two months free to all acquired listeners. - Yes, thank you, Century. Well, before we move on the story here, I think there's a couple of little rabbit holes I want to go down. So we've talked about this cryptographic work a few times. I want to talk a little bit about the idea of one-way functions in computer science. There are certain types of math that are very easy to do in one direction, but very difficult to undo in the other direction. And a classic example of this is the product of two prime numbers. So if you multiply prime number A by prime number B, it's fairly easy to do that math. You could imagine literally doing it on paper, you could imagine writing a computer program to do it, bringing those numbers into the registers and assembly code, multiplying them together. But if you're given the product of those two numbers, especially when all the numbers you were dealing with are very large, you can imagine that it gets extremely difficult and would be very inefficient to try and figure out what the initial two prime numbers were that created that product. So that the magic that makes this one-way function work is the fact that it's easy to multiply two prime numbers together, but very difficult to factor large primes. And of course, it's gotten much more complex since this initial insight. But I do want to pause on that for a minute and say the implication here is that it's very easy to check someone's work. When they tell you they have the answer to this product and they provide you one of the factors or one of those initial prime numbers, you can very quickly do that math and say, yep, checks out. But it's super hard for you to stumble on to the exact two initial numbers without knowing any other piece of information. So this system, totally ingenious, I want to David Rosenthal style here, rewind back to 1874. William Stanley Jevin's wrote in The Principles of Science. Keep in mind, this is a little under 100 years before the personal computer was created. Can the readers say what two numbers multiplied together will produce the number 8,616,460,799? I think it will be quite unlikely that anyone but myself will ever know. So he sort of came on to this, the very first idea of the one-way function. And obviously now a computer can very quickly through brute force sort of figure out what the two, you know, guess and check, guess and check, figure out what the two factors of that number are. But you can imagine if that number were extremely large, then it would take modern computers a very long time. Or frankly, if you make them large enough, it makes it impossible to our knowledge for computers today to undo that problem. It requires just way, way, way too much work. And if you make them even bigger than that, then you can say assuming computers get better at a certain rate, like this problem is never undoable. There's a scary thing that exists here, which is at some point, like we have not proven for sure that one-way functions exist. We've tried to undo them a bunch of different ways and mathematicians everywhere have tried to sort of prove this problem. It's this kind of scary thing. We're like, we rely on this for public-private key encryption and encryption of all kinds, hashing, everything in Bitcoin is based on anything with any password that you log into anywhere is based on this. Your email is based on it. And we're like pretty sure that you can do it in the other direction in a computationally efficient way. But we're not provably sure. Yeah, right, when we were saying a minute ago that you would have to put all the computing power that's gone into Bitcoin, back into Bitcoin, back into trying to forge it. That would not be the case if you had a way to break this encryption. If you stumbled onto, yeah, like a different, if you basically invented a novel algorithm that mathematically could undo that work just as efficiently as it was done, instead of the horribly inefficient way that we know how to do it now, which is basically brute force. But the point is like, yeah, that would break Bitcoin. That would also break all security. You could log into any account anywhere. So it would break the traditional system, too. Absolutely, absolutely. One other little aside, which I think is a fun place to put it here, is this notion of public key encryption, which is advancing further on this idea of using one-way functions, which is the thing we were talking about earlier, where I can broadcast my public key so anybody can send something to me, but only I have the private key, so I am the only person who can either decrypt the message or send it to someone else or however you decide to leverage that. This concept is actually born out of that 1874 discovery of prime factorization. Pretty amazingly, two different groups of people took this idea and turned it into this public private key discovery right around the same time, 1973 in Britain, but they kept it a secret because they wanted to use it for defense because it's frickin' brilliant that you have the notion of transmitting messages in a more secure way on the battlefield. The very same idea was discovered kind of within the same time and ultimately was publicly announced in 1977, now known as RSA encryption, and it's crazy to me that it's kind of like physics or calculus, where private public key encryption was sort of dual discovered in the same decade by different people who had no notion of each other. And in fact, the first set of people was desperately trying to keep it a national security secret. And it's like the world was just ready for the discovery, the technology and modern math had advanced to the point where based on the same foundation, two different groups could independently make the same inventions simultaneously. It's just really interesting. - Totally, okay, so now we've got our math lessons done. We know how encryption works, we know private and public key, we know why that's better than the traditional financial system. Now we also know with blockchain, why, and how mining creates this scarcity and makes sure that transactions that are the legitimate transactions are the only ones that can happen. What's cool here is this basically turns into a regular acquired episode now because remember how I was saying that as the system of mining grows, the more mining power that goes in and the more transactions that happen, it becomes a network economy, and then the overall value grows. It's just like Facebook, so the thing back to the social network, which is gonna come up in a second, that line of like if you created Facebook, you'd have created Facebook. Anybody can create Facebook, anybody can create Twitter. Look at parlor, right? The question isn't creating it. It's getting critical mass of the usage. And then the value, it's valued based on network economies. We know how to value them. Metcalf's law, which is the value of the economy is the square of the participating nodes within it. So now it becomes a race because anybody could take the white paper and start their own coins, their own cryptocurrencies, their own blockchains. JP Morgan could just go take this and implement it for all of their-- - In fact, many people tried, right? Like all these altcoins were forks of the Bitcoin source code to my favorite little tweak on this and dogecoin and thousands and thousands of people have tried to create alternate cryptocurrencies with varying levels of success. - Yep, totally. And some of them are quite valuable. But having that early lead and then growing the network and getting use cases for it, just like Facebook on college campuses, that's what starts the snowball rolling. And then the bigger it gets, the less and less likely it is that anybody's gonna catch up. So in January 2009, Satoshi boots up the system. Essentially, he codes it up. He creates version 0.1. - Which is amazing, by the way. You've got not only this like researchy look and white paper that was published, which several other people published competing ideas up to this point, I think hash cash was one of them that weren't maybe quite as elegant that had some of the same component parts. But Satoshi Nakamoto, pseudonymous or not, not only publishes the paper, but then of course writes the first actual working implementation in code. - Hash cash is interesting. This isn't a side, but it was, it's probably the thing that was closest to Bitcoin before Bitcoin, but it wasn't designed as money. It was designed as an anti-span system for even all. - This is freaking brilliant. So this proof-of-work concept that we talked about earlier, where it's extremely difficult to do the math in one direction, but very easy to check that the math was done, was basically applied as a spam filter. You said, hey, you kinda have to do this much computing work in order to be able to email me. I can quickly check if you did that work, but it can be real expensive if you wanna de-doss my email and spam the crap out of me, 'cause I'll just kind of reject it if the math is wrong on the check. - Okay, so beginning of January 2009, Satoshi boots up the system, literally boots traps it. He mines the first block, the Genesis block. He gets his reward, he day, she gets their reward of 50 Bitcoins, and then he starts recruiting an open source community of researchers to work on the product, work on the code, build the system, create mining nodes. This all starts happening a couple days later, Nakamoto sends the first Bitcoin transaction to Hal Finney, who was a researcher who he had recruited, a crypto researcher, into working on that. - And is this on that Cypher Funks email list? - Yes, so Hal was a Cypher Funk, tragically, I think he died of Lou Gehrig's disease a few years ago. I think it was all on the same email list that he sent the white paper out to. So he sends the first actual transaction out there, gets mined on Satoshi's mining rig. And for the next year, that's kinda how things go until May 22nd, 2010, the infamous pizza day when one of the researchers working on the project, Florida programmer named Lazlo Heimjec, I think that's how you pronounce it, not sure if that's 100% right. He offers up an idea to see if these transactions can actually have value in the real world. He says he will transfer 10,000 Bitcoins in exchange for anybody out there on the mailing list who wants to buy him a pizza. - I like this. - So programmery. - So great. So somebody in England of all places, all the way across the Atlantic Ocean, sees this and is like, I'll do that. I'll take 10,000 Bitcoins. So this person couldn't get their name. They call up the local pop of Johns. Near Lazlo, they ordered two pizzas, using a credit card, have them sent and delivered to Lazlo and Lazlo then sends 10,000 Bitcoins over an exchange for this. And this is the first real world transaction. - I think this with Bitcoin. - Approximately values Bitcoin at 0.25 cents per Bitcoin. - Yeah, I think that's if you assume like 20 bucks for the pizza. - 25, yeah. It's also funny to think about like, sure, yeah, I'll order you a pizza. That saves me 20 blocks that I don't have to mine. Like if you're like, yeah, yeah, this is valuable. It's taking me forever to mine these blocks, great. - Yeah, amazing. I just also look like pop of Johns. That's the first shack is on their board of directors. He should be prey out. - There you go. - Shortly after that, is when Nakamoto disappears off the internet, stops contributing to the projects. He transfers control of the open search repositories to some of the other developers on the project. He basically washes his hands and says, "I'm done, except at this point he has somewhere "between 600,000 and a million Bitcoins "that he's mined as the first minor on the system." - He has a million of the, you know, whatever four or five million that existed at that point, 21 million that will exist total. Like this is a huge amount of the Bitcoin in the world. - Yeah, which nobody thinks twice about at the moment. They're like, oh, okay, I guess he like moved on. He actually communicates with somebody asks him what's going on and he says in an email message, I think I've moved on to other projects, but there was never any personally identifiable information out there about this guy or group or girl or people. - And what Satoshi did is quite remarkable in being untraceable. Like most of the time, these people slip up in some capacity. Like their personal account is the first one to follow their account. Are they, if, you know, their emails are ever leaked, like they made a communication with, or their backup email is their personal email, or they did a two-factor auth from their phone number, or, you know, there's all kinds of ways that like you sort of discover later. Yep, turns out this really was this person. Oh, the, the first time they registered the domain name, they did it with their email address. Like Satoshi did none of these things. And to this day, it could be one of 10 people who people think it is, or it could be none of those people. And we have no idea. - Well, and I think this is also one of the reasons why people really believe it was a group of people. Because then if it's a group of people, then there's obviously no way that they would slip up and identify, expose personal information. - The paper is also written "we," whether that's the royal "we," I don't know, but they keep saying "we" proposed this following solution. - So, he disappears. Interest keeps growing though, and some transactions happen mostly between the people that are mining the currency. In early 2010, a forum user on bitcointalk.org named Smoke Too Much. That's Smoke T-O-O-M-U-C-H. Offers to auction 10,000 bitcoins for $50. So it's like $25 for the Papa John, so he wants sort of twice the amount of money wants a 2X return. Nobody takes them up on it though. So in April, he declares the auction over. He keeps the 10,000 bitcoins, I guess. Nobody gets them. Probably pretty good for him. Interest does keep growing though. People do start tracking roughly the exchange rate between the US dollar and bitcoin. It rises up by the beginning of 2011 to 30 cents per bitcoin by whatever metrics people are sort of using to ask. - Which is already a point in time. - 100 and the 20X return on the Papa John's deal. - No, even more than that because the Papa John's was a fraction of a cent, right? And this is what now, 30 cents? - 30 cents. - Yeah, so 120X, like, it's kind of crazy to think about. When I said earlier, this was a 3,000X, it's crazy to think about what a gigantic multiple of that was so early. It's kind of like if you buy a penny stock that actually makes it into dollar territory, you had this unbelievable return. It's that. - Yup, it's that. And then it keeps going. So by the end of 2011, there's a pretty robust market for exchanging dollars into bitcoin, which we're going to talk about in one sec, and bitcoins are going for $5.27 per bitcoin, which is crazy. Like who out there is going to be using it? Who wants to be exchanging dollars in bitcoin all the time? - That's a $52,000 pizza at that point. - Yeah, that's a lot of dough. So it turns out that in February of this year in 2011, a little service calling itself the Silk Road launched. And this was the first killer app for bitcoin. - Yeah, it's worth pointing out here that if one of the primary value propositions of your product is it's like money, but you don't have to put your name on the account. You're going to attract some people who are using it, who don't want to put their name on an account, and otherwise would have to in any other system. - Yeah, so this is just amazing to start. And this is actually when I first started hearing about bitcoin was I started reading the headlines about the Silk Road and what was going on. And I was like, whoa, that's like crazy. But this bitcoin thing is kind of interesting underneath it. So in February 2011, somebody calling themselves the dread pirate Roberts named after the character in the Princess Bride movie, which is just amazing. Launches an online black market and the first modern darknet market on tour, which is encrypted internet that you need and encrypted browser to browse. And this thing is basically eBay for illegal stuff. Well, to eBay for anything, the biggest items that are transacted on it are not beanie babies, it's drugs. - Right, it's, I mean, you're using a browser where the web history is not saved, where it bounces through a bunch of proxy servers, all the traffic is encrypted. And now finally, you have a way that you can pay for stuff that doesn't ever get linked back to a financial institution that is associated with your name. Like, it couldn't be the more perfect cocktail for selling drugs on the internet. - Totally. And what's kind of amazing is that like, it's exactly like eBay. So the way this worked was people would pay for the goods, the drugs that they were buying with bitcoin, just like PayPal. And then the sellers would put the drugs in the mail, like the US post office, because you can't search mail, it's illegal. It would, it's mail fraud. And so it's literally just like eBay. This is exactly how this is working. It's eBay for drugs. - I guess I always assumed they had to, I just never really thought about like, how would you get it mailed to you? - All right, how would you get the goods, yeah. - Most of these people aren't in the same city. It's happening all over the world. - Right. - And, yeah, so it was actually kind of crazy. So this character, Dreadpire Roberts, he wrote that he wanted Silk Road quote, "Grow into a force to be reckoned with that can challenge the powers that be. And at last give people the option to choose freedom over tyranny." It's kind of amazing. There was a full club section on the website and the book club still exists. It's like part of a message board now. - No way. - So the business model that they had, I think eventually they did shift to an eBay style, is to spot like a traditional marketplace taking a cut of every transaction. But at the beginning, I think they didn't want to get involved in the transactions themselves. So. - Oh yeah, that'll legally protect you as long as you're not taking a video. - Yeah, yeah, for sure, for sure. It's all good. We're just the platform. We don't know what happens on the platform. So the first business model was you actually had to pay to create a seller account. So you paid in Bitcoin to create an account that you could then sell whatever it is you wanted to sell on Silk Road. Amazing. So this operates for two and a half years starting in February 2011. - And by the way, there was a federal case opened almost immediately. Like I think, I know that the feds were following for two years putting the case together. So like observing everything that's going on. - Well, and there was, I think it was Chuck Schumer. There's a great story that like he was showing this on a computer. Like totally flipped out was like the government needs to like we need the FBI to crack down. Like of course. And so during this time, this amazing. Over 1.2 million transactions happened on Silk Road. So if you're trying to bootstrap up the Bitcoin network of the killer use case like this is like looking at, you know, attractive freshmen of the opposite sex on campus for Facebook. Like this is the way to get people. - Right, it's like the pseudo nefarious catnip. Here's an amazing use case that appeals to people's vices for this new medium that has been invented. - Yep, just like any new medium technology. There's no regulation yet. So over a million transactions, almost 150,000 unique buyers and almost 4,000 unique sellers use the platform over this period of time. They transact almost 10 million bitcoins, which I don't know how many bitcoins were in circulation at that time, but let's estimate like, I don't know, two to three, four million maybe. So like several times over the total number of bitcoins in circulation get transacted in the Silk Road. - Knowing what we now know about how the Bitcoin network works. Like the Silk Road can be largely credited with getting it over the hump to the level of transactions and the level of participants in the network where it's now a self-fulfilling prophecy of integrity and certainty of the network. - A hundred percent. This is what's so ironic that it's-- - It's funny that I use the word integrity. It's like the acts of the, potentially the least, depending on who, what moral authority you wanna claim, the acts of least integrity guaranteed the future integrity of this financial system. - Incredible, like you can't make this stuff up. So finally, in October 2013, FBI agents, this is amazing, conduct a sting raid, they arrest a man named Ross Ulbrich at the Glen Park Library in San Francisco. This is like half a mile from my house. It's like right down the street, I drive by it all the time. It's this little, like Glen Park is this beautiful little neighborhood in San Francisco. The hotel in Jim, nobody knows about it's very sleepy, very like neighborhoody feel, and the library is this like small little branch right next to the grocery store there. So Ross is hanging out, working out of the library in Glen Park and three FBI agents conduct a sting raid. Two of them pretend to be a couple, a romantic couple, that are having an argument, and they have like a loud argument to distract him in the library, and then so that he looks up away from his computer. And then the other one comes and grabs the computer so that he can't lock it while they're arguing. Of course, it was suspected and then proved to be true that Ross was dread pirate robberts. - Wow. And when he was convicted, like he tried to have someone killed, right? - Yeah, so that's the allegation. He was never convicted of this, but part of the allegation so the government brought against him, where that, you know, he's an interesting character. He grew up in Austin, Texas, and his dude was an eagle scout in high school. Yeah, so quite the reversal from eagle scout to, I don't wanna say drug lord because, you know, he was just operating the platform, but he had quite the journey, let's say. So he had kind of supposedly, and he wasn't convicted on attempted murder charges, but gotten more and more paranoid as he was operating this site with the pseudonym and thought that people were out to get him, which obviously they were, the FBI agents at least. And so the accusation was that he had tried to pay, I don't know if it was through Silk Road or through other dark net sites. He tried to pay to have people killed who he thought were after him. Nobody was actually killed. None of this actually happened and he wasn't convicted, but he was convicted of seven charges related to money laundering, computer hacking, conspiracy to traffic narcotics, et cetera, et cetera. And he's in jail for life, right? Yeah, he was sentenced by the federal court, US federal court in Manhattan to life in prison without the possibility of parole. I think maybe like multiple life sentences, kind of crazy. There was actually, there's talk of like, Trump wanted to pardon him or they got it. So crazy, but like he's, he's in jail. He's in there. Yeah, I know he doesn't give interviews either. He's, he's very tight lipped. Like a lot of journalists, obviously, have tried to sort of reach out and get his side of the story, but it's not happening. Yeah, so this is where like, again, this is all just, you know, Silk Road itself was creating more interesting Bitcoin. This crazy media story is creating more interesting Bitcoin. The FBI as part of this raid, remember they got his computer? They seized all of his Bitcoins. So the US government now has 144,000 Bitcoins that they've seized from Ross and from the Silk Road, which at the time wasn't worth that much money and was worth about $4.3 billion. It's a lot of money. So the next year, I had forgotten about this, they'll do it in the research. This is amazing. They hold an auction, an online auction. Like, this, you know, US Marshalls, they do a raid, they hold, you know, they get drug dealers, like, you know, Lamborghini's and stuff and they auction them off. They do the same thing with the Bitcoin online. So they auction about 30,000 of the 144,000 Bitcoin online and Tim Draper, the venture capitalist, you know, founder of DOJ, he buys the Bitcoin tie guy. He, Bitcoin tie guy, he buys the Bitcoin and it's all like a publicity stunt, but he paid 17 million for 30,000 Bitcoin. - Wow. - I hope he held on to those 'cause he would be doing probably better than his entire venture career on that at this point, amazing. So fun little coda on that, actually in November of 2020, so like two months ago, part of, I don't think it was part of the 144,000 Bitcoin, but there was another about 70,000 Bitcoin that were known to have been associated with Silk Road, like part of Silk Road's Bitcoin that people didn't know where they were. They transacted on the blockchain and so people saw this transaction happen. They're like, whoa, what happened? And it was about a billion dollars at the prices a couple months ago with the 70,000 Bitcoin and it turns out what the transaction was that the FBI haven't identified who or the circumstances, but the FBI had found, they call it individual X in when they came forward and explained what happened. This person had hacked Ross in the Silk Road before all this went down and stolen these 70,000 Bitcoin's from Ross and then the FBI tracked him down and then the transfer was they were transferring those Bitcoin's to federal custody. - Oh, interesting. So-- - Isn't that amazing? - So the person committed a different crime hacking Ross and the FBI was wasting the crime of hacking? - Yes, the crime against the criminal. - It's worth contextualizing a little bit sort of what's happening here when someone gets hacked or when Bitcoin get lost 'cause those are sort of two different things. There's the situation-- - Right, it's not the fault of Bitcoin when that happens. - Sort of, it's the fault of Bitcoin for having a wildly obscure system that makes this whole thing tick. But is it the pilot's fault when it's hard to find a complicated airplane? That's like the question here. So of course, you can sort of hack into Ross's computer, you can get his private key and then you can use his private key to authorize sending the $20, $20 billion worth of Bitcoin over to your account. That is a very different thing than what has happened for something like 20% of the entire Bitcoin supply which when you look through the ledger through the entire blockchain has not transacted in a really long time, presumed to be lost. And what lost means is the owner of the person who was most recently transferred to has lost access to the private key, which is of course an unguessable, crazy, long, number, letter accommodation that no one's ever going to be able to sort of guess. It's not like you can click if forgot your password button. For those people, like if you lose your private key, you're never going to be able to, I suppose you still own the Bitcoin, but who cares because you can't ever do anything with it. - Right, when you lose your email password or whatnot, there is a centralized provider, you know, Gmail or whoever you're using. They know your email passwords, so you can go through some hoops with them to get it. But there is no centralized as we talked about Bitcoin provider, so you better not lose your password. - Yeah, decentralization is a double-edged sword, for sure, for sure. There's one other number that's interesting to know here. The Satoshi, it is currently believed that he ended up mining about one and a half million Bitcoin, which, you know, of the eventual 21 million, so a huge amount are owned by whoever this Satoshi person or group of people are. That's about $50 billion worth of Bitcoin. So you've got 20% of Bitcoin or lost, you've got what are maybe seven, eight percent that Satoshi, whoever Satoshi is owns, there's all these Bitcoin that are sort of like in areas that aren't transacting, people holding the front of the long term. So there's only like, even today, like three or four million Bitcoin that are actually trading hands and available in the supply-demand equation to set the price. - I mean, even just all of these Bitcoin's associated with Silk Road that we're talking about, that's like one to two percent of Bitcoin's out there, right there, just that we're, this wasn't transactions on Silk Road, this was like Silk Road's Bitcoins. - Right, right. So the takeaway here is like, a lot of the big chunks of Bitcoin are owned by people who were using Bitcoin very early when, you know, you could mine huge blocks and it didn't take that much compute to do so. - Yep, okay, so Silk Road by 2013 is, it's the end of it, but while all this was going on from, call it 2011 to 2013 as Silk Road was growing, all these people who were using it, they had to find, have a way to get Bitcoin. They weren't just going to like email the, the list serves on bitcointalk.org and be like, hey, I want to buy some Bitcoin so I can buy some drugs. There's got to be an easier way for them to buy in to the system, so to speak. And the way to do that is through exchanges. And so this is how, you know, just like any kind of currency exchange, like you said, this has been part of financial institutions. - You need somebody to stand up the store that's going to accept your dollars and hand you Bitcoin in exchange. That store is going to be on the internet, but someone's got to operate it. - Exactly. And so for almost all of this period of time, there was really only one viable exchange on the internet. And it was an organization called Mount Gox. That sounds right, you know, like a mountain, like sounds like Fort Knox, you know, like Mount Gox. It's a, trustworthy, secure organization that's going to store your Bitcoin and you're going to be able to exchange and buy it, right? Well, had an interesting history of its own, shall we say? So what is Mount Gox? We go all the way back to 2006 when a developer named Jeb McKaylib, it was a big fan. - It's a fan, right? - No, no, no, no, in the US. - Okay. - Was a big fan, as am I, as are many people, of the then going online, but physical card trading game, magic, the gathering. He thought, you know, gosh, like these magic cards, they're super cool, lots of people love playing. You can buy them on eBay and whatnot, but there should be like a, there should be, just like, you know, later there would be goat and reverb and what they should be a vertical, like, specific website on the internet for going and buying and selling magic cards. Create, I'm just gonna code that up. Why don't we call it magic, the gathering online exchange? M-T-G-O-X, Mt. Gocks. (laughs) So this was created by Jeb in 2006. I don't know if he was not very good at distribution or whatnot, like, clearly, like, there's demand for this. Like this, lots of people are trying to build this now for magic cards and Pokemon cards and other cards. But for whatever reason, Mt. Gocks in its initial iteration didn't quite take off. He had it up for about three months. Nobody really used it. He abandoned the site. Now, we mentioned his name is Jed, Michaela of his programmer. He's not just like any programmer. This is nuts. So do you know who he has been? No, I don't. So today, he is the co-founder and CTO of Stellar, which is a really interesting crypto project organization out there, I think it's actually nonprofit. Doing cross-border remittances. It's backed by Stripe, Stripe is invested in it. Prior to Stellar, but well after Mt. Gocks, he founded Ripple and he was the founder and the CTO of Ripple. Obviously, of course, another cryptocurrency with its own story behind it. How, after the-- The incredible tragedy that we're about to get into of Mt. Gocks, was he credible enough to then lead to other cryptocurrency stars? Really, really credible big cryptocurrency stars, because he wasn't actually involved in Mt. Gocks through everything we're about to talk about. So here's what happened. He abandoned the magic thing, but he still had the website. And then, super early and cryptically, I remember, he does all these crypto projects. He, I don't know if he was on the original email list. He hears about it. And in July 2010, so right after pizza day, he gets involved and he realizes the need for this exchange for people to come in and be able to buy Bitcoin. And he says, oh, cool, I can code that up. I know how to do this. And he's got the Mt. Gocks.com MTG-O-X website lying around. He just says, oh, great, rather than-- I don't know why, rather than registering a new domain name, I'm going to use that. OK, in my head, I had this notion that people were listing Bitcoin in the same way that they should have been listing magic. Oh, exactly, magic. He just repurposed the domain. Oh, it's like, oh, you could buy a dual land, or you could buy a, like a Satoshi, amazing, amazing. No, it was repurposed into just a Bitcoin exchange. And so help me understand, at this point in history, if you're going to be dulling out Bitcoin in exchange for dollars, you got to get your Bitcoin from somewhere. So are they mining in order to create the supply that they're selling out to people who are causing their dollars? I assume so, but I don't really know. I bet that is, Jeb quickly realizes like, this is going to be a major undertaking to do this, probably for that very reason, let alone operating in the exchange, making sure all these transactions happen, taking custody, doing them well. He, after just a few months, he runs it for about eight months himself, and then in March of 2011-- this is where Japan comes in-- he sells it. So he's just running it. He decides, you know what? I'm going to sell the whole thing. He is an interested buyer, a guy named Mark Carpellis, who is a French programmer, who was living in Japan at the time, a super interesting character. And he makes an offer to buy Mt. Gox from McKaylob, which he does in March of 2011. And the statement at the time, McKaylob makes a statement. He says, to really make Mt. Gox what it has the potential to be, which is huge, like this is Coinbase, and Square Crypto, and Robinhood, everything before that, to really take it to what it has the potential to be would require more time than I have right now. So I've decided to pass the torch to someone better able to take the site to the next level. Unfortunately, that was not Mark. So right after a couple months afterwards in June 2011, after Mark takes over the site, the first security breach happens of Mt. Gox. Bitcoins are stolen and lost October 2011. They send 2,500 Bitcoins to the wrong addresses. And again, to the point of like, if it ends up in the wrong place and you don't have the private keys, they're gone forever. So spectre, unfortunately, have things to come here with Mt. Gox, 2,500 Bitcoins lost forever. But there's no other exchanges out there. So like anybody who wants to come in, anybody who wants to transact on Silk Road, just be involved in any way as part of the ecosystem, they got to go to Mt. Gox. And they handle for the next year and a half about 70% of all transactions in and out of Bitcoin that happened on the internet. - That's right, it was so dominant. I mean, that was like, I think that even held me back from buying Bitcoin in those days. Because I'm hearing people talk about it. I had friends texting me about it. And I remember going to Mt. Gox and being like, ah, I just don't know. - Yeah, this is like super shady. Not to mention, you know, Silk Road and all this out there like definitely held Bitcoin back from becoming mainstream for at least a year. - It's so funny in the whole like crossing the chasm framework. Like in some ways, I am an early adopter, but I'm not like gonna adopt something that is only being used in my perception for like illicit drug use on the dark web, right? Like it took until like Coinbase came around. I think 2014 is when I started getting more interested in it. But like it, it had to be at least that mainstream. - Yep, same here. That was, I started hearing about it with Silk Road and Mt. Gox and everything going on. But yeah, Coinbase was when I did my first transactions. So by April of 2013. So few months before Silk Road gets the sting operation happens and Silk Road goes down. Mt. Gox finally starts its death spiral. So they crash at a certain point because of the volume that is happening on the system in April. It's completely overwhelmed. They suspend trading. The price of Bitcoin crashes 50% just by virtue of, 'cause you know, they're doing 70% of the market. All of a sudden, if you like, if the New York Stock Exchange just went offline, so the price crashes, bunch of lawsuits started that they could hit with. Then in June of 2013, Mt. Gox stops the ability to withdraw in US dollars. So you can still withdraw in other currencies, but like clearly things are not well here, not looking good. And then in February of 2014, they suspend withdrawals altogether. So you can't take money out of the system at all from Mt. Gox and they file for bankruptcy. - And could you transfer to like, if you have your own like hardware wallet or something, like if you knew an address of another bit, if you knew another Bitcoin address, could you transfer? - I mean, it gets at various points a long way, but eventually you can't even do that. And ultimately, 750,000 client Bitcoins, like Bitcoins that people were holding in Mt. Gox, get lost, like permanently lost. Private keys are lost, they're gone. I mean, almost a million. And then another 100,000 that was owned by Mt. Gox itself. So that's 7% at the time of all the Bitcoins in circulation, just blown out of this guy when Mt. Gox goes under. - And just in client dollars, that's 22 and a half billion dollars of Bitcoin today that are just, that they exist, but assuming that those people didn't download their private keys, like, and they just trusted Mt. Gox to say, you keep my private key, or maybe they couldn't even download the private keys, but basically like, if you know the private key, you're not sending it anywhere. - Yep, gone. So fortunately though, by the time this starts to happen and Mt. Gox enters its sort of mid-2013 to beginning of 2014, death spiral, enough other people and other business-minded people had gotten turned on to Bitcoin and interested in the system that they were like, holy crap, we need better exchanges here. Let's go build them. So in many ways, now the most well-known, one of these is of course Coinbase that we talked about. So in June of 2012, two co-founders, former Airbnb engineer, Brian Armstrong, and Goldman Sachs, trader, Fred Ersem, they're like, we need to build an exchange and not just an exchange to compete with Mt. Gox, we need to build like a legitimate exchange that people are gonna trust to use, that we're gonna work with regulators, that we're gonna, you know, make sure that when people cash out of Bitcoin, they pay their taxes, you know, do all these things to build this into a real functioning system, and importantly, not just an exchange, it's an exchange and cloud wallet. - Exactly. - This is the innovation that it will make some people who are sort of true believers in Bitcoin who are sort of part of the initial movement, it makes their skin crawl because it is ruining the decentralization, but what they're basically doing with a cloud wallet is saying, look, you're gonna buy your Bitcoin from us, you're not gonna take your own custody of it because like, you don't wanna be in the business of having Bitcoin on your hard drive, secured by your own public private key pair that you manage, be responsible for backing up that drive somewhere, but making sure you don't make too many copies of your private key to explain, like, you don't wanna be responsible for all that. What you should do is just the same way you manage any other username and password, you let us maintain your public private key pair, the effectively it lives in our cloud on our servers, and you log in with a username and password, and you do two FAA and all the stuff that you trust, but like, we have custody of your money, it's kinda like a bank. - Or maybe more like a bank or like a brokerage firm, like Charles Schwab, you don't hold your stock certificates that you have in Schwab or Vanguard or whatever, they do, but then you don't have to deal with the complexity. - It's a little compromise, but it makes it way more accessible to way more people. - And obviously just like, you know, if you're a hedge fund, you're not gonna use Schwab, you're gonna do all that yourself. If you're a big player in crypto, whether you're an institution or otherwise, you're gonna have your own wallets, you're gonna do it yourself, you're gonna cut up your, you know, print out your private keys, you're gonna cut them up in the store pieces of those keys in safe deposit boxes all over the world, you know, that kind of stuff. But the average user, you and me, well, we're not gonna do that. - Not to mention it's a bare asset, so you don't wanna keep it on you. Like if, if, you know, I don't hold a lot of Bitcoin, but I could imagine like if I did, I wouldn't wanna be broadcasting like yep, but I've got it right here on my computer with me. You know, it's a, it's something where you want, you want the asset to live kind of at an arm's length from you personally. - This is how the feds seized all the Bitcoin from DPR when they raided Silk Road. It was just there on his computer. - Makes sense. It's effectively like walking around with a, you know, millions of dollars in cash lining your jacket pockets. Like you wanna keep that somewhere else. - Yeah, totally, and not just under your mattress. So Coinbase does YC, summer of 2012. They raise a seed from initialized in angels right afterwards. Then they raise an A for meaning in square ventures, then they raise a B from Andrieson. They start building all this infrastructure, making it secure. Now they're huge. This is great for the ecosystem. The other really interesting story. So Coinbase is basically like, you know, they have Coinbase pro now and institutions use it too, but like, it makes it retail accessible to, you know, just like Schwab, just like Vanguard, et cetera, or a bank. - Robinhoodification of crypto. - Exactly. And of course, now you can do trade crypto in Robinhood itself too and in square. And then like, all right, so Coinbase is sort of attacking the retail side, if you will, of people interested in crypto. There's an even bigger prize out there, though, that people start to realize, which is, you know, getting the retail customers, that's great. But what if you can get institutions, as this becomes an asset class, you're gonna start to have hedge funds, endowments, company balance sheets themselves. Large pools of capital are gonna be interested in also playing in this ecosystem. Well, what kind of infrastructure do we need to make that happen? And that looks actually pretty different than just retail infrastructure. So here is where the story takes another just incredible turn. - I don't know where you're going with this. - Remember I said the social network would come back? - Oh, yes, I didn't. - Into play here, the Winkelvoss twins. It's been so fun to like read about this and have gone and watched a few videos with them. My opinion has completely changed from doing this research. So of course, people probably know the story of the Winkelvoss is as part of the origin of Facebook and the social network and that there are two twins who were a few years ahead of Mark Zuckerberg at Harvard. And they had had the idea for what became Facebook and hired Mark to be a developer for them to help build it. And then allegedly, Mark had said, "Hey, this is actually a really good idea. "I'm just gonna go do it myself." There was a big lawsuit about this. They sued Mark in 2004. It was eventually settled in 2008 for $65 million settlement payment from Mark. - That's a nice down payment on some Bitcoin. - Well, here's where the story gets really interesting. So at the time, everybody thought, this is crazy, you know, it's the line from the social network. If you'd invented Facebook, you would have invented Facebook. Ideas are cheap, execution is everything. These guys are crazy, they don't know what they're talking about. Maybe that's true, but these guys are also really smart. So when the settlement happened, 20 million dollars of the settlement went to legal fees. So they got $45 million before taxes. And everybody's like, this is great. You're gonna be set up for life, et cetera. They were rowers. They actually participated in the 2012 Olympics. You guys can just go be athletes. They said, no, we don't want the money in cash. We're gonna take the money in Facebook stock. So they took all $45 million in 2008 Facebook stock. It was great quote on this, Karen says in a New New York Times article, the lawyers thought we were crazy for taking the money in Facebook stock. We thought they were crazy for taking their 20 million in cash. [laughs] The stock that they get by the time Facebook goes public in 2012 was worth around $300 million. And in the interim in the previous four years, they moved to the UK because the 2012 Olympics were in London. So they come back in 2012. Facebook's gone public. They're worth $300 million. And the story is that they're on vacation in Spain after the Olympics. And they meet a guy there from the US who starts telling them about Bitcoin still really early. Coinbase was just going through YC at this point in time. And Cameron and Tyler, as they start to learn about it and think about it, they realize like, holy crap. This is money with network effects. So they go all in on Bitcoin. They don't put the whole $300 million in. That would have been like the whole market cap of Bitcoin itself at the time. But they start buying Bitcoin in summer 2012. At about $10 a Bitcoin, they end up accumulating well over $100,000 Bitcoins that cost them under $10 million. And it was 1% of all Bitcoin outstanding at the time. Wow. Totally incredible. They say, what if we build an exchange specifically for institutions like Coinbase have retail? So they start and fund an exchange called Gemini, which still exists today, with the whole target of being certified by regulators for institutions. They end up getting a license from New York State regulators that allows them to be a custodian for regulated asset managers and banks that know whether exchange at the time had, and then a few years later in 2017, when the Chicago Board of Exchange launched Bitcoin futures on the CBOE, which was a huge moment, a big part of the run up of Bitcoin in 2017. It was actually Gemini that was settling all the futures on the exchange. Crazy. So super interesting. I mean, thank God that Coinbase Gemini, there were others out there as well, who saw like, hey, the future is bright for Bitcoin if we can start to build some real institutions with that work with regulators that people can trust and are going to be legal. Otherwise, everything's going to go down in flames with Mt. Gox. So through all this, Bitcoin as an asset keeps growing with an insane amount of volatility, of course, which still continues to this day. - Bubble after bubble after bubble and, you know, pop, pop, pop. - Yep, but with each bubble, it keeps going higher and then the new floor price resets higher. 2012, the price started at $5.27 per Bitcoin by the end of the year. It's at $13.30. And then 2013, this was the huge breakout year. So even despite Mt. Gox and Silk Road and everything going down the tubes, started the year at just over $13, as we said, by the end of 2013, January 1st, 2014, Bitcoin is at $770 per Bitcoin exchange rate. That is some serious appreciation in just one year. - Yep. And then I think even after that, then fell down to like 200 or something. Like that was the next. - So then when Mt. Gox finally disappeared in those 3/4 of a million plus Bitcoin disappeared, that was a huge hit to the system. Price fell down to about $300. And then 2015 mostly stayed in that 3/4 or $500 range. By 2016 though, all this infrastructure is starting to come online. Coinbase has raised a lot of money. Lots of accounts being created. They're seeing very high trading and exchange volumes, same with Gemini, same with other exchanges. By the end of 2016, the price hits $998 per Bitcoin. So just a hair under $1,000 a Bitcoin. I mean, this is now the beginning of 2017. What was this six years earlier? You could barely buy a pizza for $10,000 Bitcoin? - Yeah, it's totally fascinating to think about. I keep referencing this 3 million X, the number that we've talked about. The initial 35,000 X was in the first five years, making it to $350 in 2015. And in the five years sense, it's actually only only, only been an 85 X. So it's like compounding math is funny that way, where if you can buy in at that incredibly low cost basis, where they started at one center, sub one cent, a lot of that sort of multiple happens in those early years, well before it even hits $1,000 a Bitcoin. - Well, what's so cool is that like, this is exactly how the venture capital markets work, right? Like, it's the early stage investments that you can generate those huge, huge multiple returns, but you can't put that many dollars to work in the early stage investment. So like you'll generate, Sequoia has figured this out, so many other big firms, you put dollars to work early, you get huge multiples on those dollars, but then you keep putting dollars to work in subsequent rounds as companies grow, get proven more and the tam expands and the market for you to be able to put those dollars to work expands. And so like, it's not just that you wanna get the 3 million X on your first dollars, you also wanna get the 85X on a lot bigger base that you're putting in later. I mean, it's also, it's just especially interesting. It's a little bit of like, as we'll get into the analysis later, I think we'll see how crazy this is, but it's strange comparing all these companies, all these corporate assets to a monetary asset, because it's not apples to apples in the way that we normally think about these types of investments, like this is a currency. The idea is that it's eventually going to be just a way that we store and transfer value, so it's just funny that like, everything we've talked about so far is about growing the value of each fraction of the Bitcoin network, a Bitcoin. - Yep, but this is the moment where things kinda tip. - Bitcoin many of the gains. - In 2017, holy crap. January 1, 2017, where at $998 a share, people are like $1,000 a Bitcoin. There's some real money here. And what is that attract, that attracts, grifters? So people had already launched other crypto projects over the previous, you know, six, seven years. Ethereum launched in 2015. There were others, there were, of course, we referenced all the altcoins and parity coins. - So much to say about Ethereum here, about DeFi, about a lot of the more modern takes using the blockchain, using cryptocurrency outside the scope of this episode, but obviously those things are interesting. - Yep, we will definitely talk about those in the future, but in 2017, people realized like, man, this is a money machine. So in May, folks may know, folks may use, it's a real company, real project, the Brave web browser, which is a privacy by default, non-tracking web browser. They launch instead of raising venture capital in a normal route. They do this thing that they call an initial coin offering, which is the same thing that Ethereum did. You know, anytime you're starting a new blockchain-based project, you have a launch just like Satoshi mine the first 50 Bitcoin's to bootstrap up the Bitcoin network. Well, Brave sells the initial tokens and they market it and they have white paper and all this stuff, and people go nuts. They raise $35 million from this ICO in 30 seconds. - In fully non-delutive capital. - Fully non-delutive capital. People start talking about like, this is the new way to raise money. This is the new way to start companies. VCs themselves go, "Gah-Gah, they're like, "Oh, wow, we're just gonna invest in ICOs from now on." It's like crowdfunding, you're raising money from your users, so all the incentives are aligned 'cause as it increases, it's gonna increase with the value of the product, blah, blah, blah. - It's totally unregulated. (laughs) So everybody and their mother, literally everybody and their mother has ICO in 2017. It's like the SPAC of 2017. DJ Khaled has an ICO. Paris Hilton has an ICO. Floyd Mayweather has an ICO. Like, I unclear what any of these projects are. - I could say, 'cause the rationale for creating your own coin is that I'm creating, I think there were DApps, right? Distributed applications or RApps, but I'm creating a distributed application and it's gonna have a network effect and there's gonna be a bunch of people that use it. So like literally the value of the pseudo virtual currency that you use on the platform will increase in value with more people using the platform. Like in the abstract, it makes sense. In the same way that in the abstract Bitcoin made sense, the difference is largely just in what actually then happened. - Yeah, totally. So, and who was pumping up these things? So, you know, Bitcoin starts the year at $1,000. There were a lot of people out there who made a lot of money just holding or hodling, which we should hodling. - Is it a misspelling of a hold or is it a hold on for dear life? - People have said both, but I think the original, it was a guy on a forum who during one of the bubble crashes for Bitcoin price was encouraging everybody to hold and not sell. And so, just typed too fast and said, "Hoddle." - It just becomes an internet meme. Like boom goes the dynamite or any other. - Oh, I haven't heard that in so long. So good. So, like there are a lot of people that have just made all this money seemingly overnight to themselves in Bitcoin. They're like, "Okay, cool, these ICOs. "Great, we'll pump the money into the ICOs." (laughs) So, by May, when the brave ICO happens, price of Bitcoin is doubled to $2,000 by the prevailing exchange rates, U.S.D. By September, it's $4,000. By the next month in October, it's $6,000. By November, it's $10,000. And by December 18th, 2017, we hit what many then later over the coming two years would believe would be the all-time high. $19,783 in six cents, per Bitcoin, unreal. $20,000 per Bitcoin. - Yeah. - And so this is like, (laughs) - For the record, I was very much in the camp at that point being, at that point I was cashed out. I was like, I'm done with this mania. There's all-time ICOs, there's like scammers, altcoins, who knows what's going on. - So many scammers. - And I definitely was like, this is totally inflated, and the highest it will ever go. I definitely remember thinking that. - I mean, it was, I remember, I don't think, I had taken a little money off the table during the run-up from not that I had or have many bitcoins, but from my experimentation's buying a few in the early days. So I had taken some money off the table and the run-up, but then after the crash, which happens in the beginning of 2018, I was like, yeah, I don't know, I don't need the money, whatever. It's an option. Let's see what happens. I'll just laugh. - Oh, you let it ride. - Oh, I let it ride. - I huddled. I huddled. - All right, so catch us up. This January 2018, you know, we see this run-up to near 20K, it falls. Clearly it has risen again. What's happened in the last couple of years? - Okay, so over the course of 2018, it falls from 20K all the way down to under 4K. So at the end of 2018 by January 2019, Bitcoin is trading at just over $3,700, down 72% for all of 2018, and down 81% from the high in December, 2017. - But underneath all of that, and I think this is what as the tide went out and the hype cycle disappeared and all of these scammers, thank God, disappeared and ICOs became, thank God, a thing in the past. - And many of them prosecuted for fraud. - Yeah, many of them and the regulators got involved, of course, and VC firms regained their sanity and started investing in normal companies as well as normal companies doing things with crypto and Bitcoin and blockchain. - And some actually into cryptocurrencies themselves, but often a little bit more mainstream than into the ICOs. - DJ Khaled coins, yeah, altcoins. - So in the background, all of this, you know, the groundwork that Gemini and Coinbase and others started laying, I kept getting built over 2018, 2019. So in 2018, Square added the ability to buy, sell, trade and hold as a custodian crypto, natively within the Square cash app. Robinhood did the same within Robinhood in 2018 and then rolled that out. I think by 2019 to their entire user base. And so you get to the summer of 2019 and Bitcoin, which again, had financed a lot of this ICO boom, but from profits that people had made in Bitcoin, but was totally unrelated. The price has recovered to about $13,000 per Bitcoin by summer of 2019 and things continue roughly in that trajectory. And then we get to March 2020 and the world changes. - All the people who have been screaming for the last five plus years that this is an uncorrelated asset and boy, oh boy, would it be nice to own some currency that's not fiat, that's not connected to a single government. If we head into a, you know, if we have a black swan event that happens and the world is falling apart, you don't want to be associated with any specific government and you want to have currency that is uncontrolled blah, blah, blah. Like boy is there an opportunity to prove you are right. - Yes, now so here's what's crazy. So obviously COVID hits the broader world in March 2020. And when there's that initial dip in the markets and panic selling and everybody thinks the crash is happening and the equity markets sell off, actually crypto and Bitcoin sells off too. So the price of Bitcoin crashes and on March 13th, 2020, remember it had been trading around $13,000, $14,000 per Bitcoin. It crashes down below $4,000, which is crazy. So it's the exact opposite of been what you were saying, what you would think. Like, hey, I want to own Bitcoin and the world's falling apart. - Dude, I remember watching that and like looking at the S&P 500 overlaid with the price of Bitcoin and I was like, huh, it's a pretty correlated asset class. - And of course, now we know with hindsight what was actually going on was there was a liquidity run and people who were holding Bitcoin were also holding other things. They had obligations and then as all the markets crashed, they needed liquidity to be able to pay off other things. And so I think that's what triggered a lot of selling at that moment. But since just like the equity markets, it recovers quickly and just starts taking off and then Ben like you were saying. So the Fed and the US government in response to COVID just starts printing money like, crazy like has never been done in our country ever before, like World War II, any other time. So during 2020, literally 22% of all of the US dollars in circulation all around the world are created in 2020. The debt to GDP ratio of the US goes from, I think it was, I don't remember exactly, somewhere like 60, 70% to 135% over the course of 2020. And this is of course financing. All the stimulus packages and all the spending that the government is doing without the revenue to back it up. - And of course, meanwhile we're in a zero interest rate environment. - Yeah, so there's sort of two things that are happening in order to do the economic stimulus. One, the government is using tax dollars to pump money back into the economy and paying people and implementing programs. - Not tax dollars. They're creating dollars. - Well, two, two. - But they're doing both. It's tax dollar allocations and the Fed is printing more money. And so they're putting more, dramatically more money into circulation, which one way to think about this for, I spend a bunch of time trying to figure out, like what's the best way for me to understand this? 'Cause I always feel like if I can understand it, then it's a pretty good proxy for everyone listening. And my sort of notion of it, and I'm sure this is not exactly right, is if you're a shareholder in a private company and you go raise more money, well, you take a bunch of delusion. Usually 15 to 30% delusion, because you're creating new shares for the shareholders. We were effectively saying, hey, everyone with dollars, you're gonna go take 20% delusion in 2020. Your dollar is gonna buy you, just gonna have less purchasing power, 'cause there's more dollars in circulation right now. Just so that there's more dollars to go around. Which, of course, it takes a while for that to percolate through the system that you actually see 20% higher prices, but eventually that will come home to roost. Yeah, so I don't think either David or I are smart enough macro-economist type people to be able to interpret where in a zero interest rate environment, the government printed a bunch of money into the money supply, who we did away with the requirement that banks hold 10% of capital and reserved that they're loaning out. Yeah, like there's a lot of, but I don't think you or I should be here. No, but I think what we are, maybe not smart enough, but what we're enough to feel that we feel, it certainly influenced my actions, actions of many investors and people all around the world probably years too, is the effects of this, which is interest rates good is zero. So all the money that I was holding in my bank account, that anyone was holding in their bank account, earning interest on, it was already really low and had been since 2008. Now it's zero. Like I was getting emails every two weeks from my bank being like, hey, we should lower your interest rate again. Exactly. And so what incentive does that create? That creates an incentive to just not hold cash. Like if you want or not hold bonds either. Like anything that's traditionally, relatively conservative investments that, as an individual or an institution, you would hold and expect to get three, four, five percent return on. You're just, you're not getting, you're getting zero. And inflation's happening, so you're getting less than zero. Well, so what does that mean? That put, it's like a balloon, you're squeezing one end, you're just gonna push people to go invest in places where they can get returned. And where's that gonna be? That's gonna be equities and Bitcoin. And specifically tech equities. And specifically, specifically early stage tech equities that people hope are gonna look one day like Amazon. So that's like what's happening in the equity markets. And of course alternative assets like Bitcoin. And so you sort of have the coupling of people, capital desperately seeking returns. So it's, there's more capital ever that's looking into and taking things like cryptocurrencies seriously. And also people really buying the story of, wait, tell me about the fundamentals of how the Bitcoin system works again. Huh, that actually does seem more and more reasonable. And huh, all these other people are into it. Okay, and a lot of legit people have parked a lot of cap. Okay. And so there's more and more legitimization of the asset class happening, more infrastructure being built up and in the environment that we're in, which one could argue is starting to show the cracks of what happens in quantitative easing, what happens in zero interest rate environments, what happens in not having hard requirements about fractional reserve banking. Like you actually start to see the way that the Bitcoin system was designed to fix all of that. Like, hey, we can't increase the money supply. It is what it's gonna be at 21 million. And you know, hey, there is no fed. Like there is no centralized, you know, place that you have to have trust in that they're gonna effectively manage it. A lot of these ideas just become more appealing at the same time as there's more capital seeking more returns. So it's this like perfect storm of the conditions created people rushing into cryptocurrencies. - And. - And specifically Bitcoin. - Well, specifically Bitcoin, but also specifically institutions this time. So like all the bubbles in the past, it was individuals, it was retail. Maybe it was some venture firms. Maybe it was the Winklevi who were buying Bitcoin. But now enough infrastructure has been laid through exchange traded funds, which now exists like grayscale, through Bitcoin futures, through custodians like Gemini and Coinbase Pro, that if you're a hedge fund or if you're a bank or if you're an endowment or if you're a company treasury, you actually maybe can access Bitcoin. So in May of 2020, Paul Tutor Jones, the famous investor, who runs a, I think, a $22, $23 billion hedge fund, he goes on CNBC and he says, hey, I actually have between one and two percent of my funds assets in Bitcoin. And at a $22 billion fund, that's two to $400 million worth of Bitcoin that has just come into-- - Investor money too. - Investor money. Yeah, not his money, it's fund money that has just come into Bitcoin. Then in August of 2020 micro strategy, which is a publicly traded investment firm, they reveal that they have $250 million in Bitcoin. Not just that they've invested in Bitcoin, but they're classifying it as a treasury reserve asset on their balance sheet. So not like an equity, specular investor, this is like, no, like we're-- - Cash, cash, cash, fabulous. - Cash, yeah, like in our treasury. Then in August, square, which of course has been part of the crypto and Bitcoin community for a long time, they put about 1% of their cash and cash equivalents on their balance sheet on their treasury into Bitcoin, about 50 million. So they're the first operating company that is now saying we're gonna have part of our cash and our treasury that we're gonna hold in Bitcoin. - Also, their rationale for why they did that and how they executed the trade is really well documented. They wrote it up, we'll link to it in our sources. It's worth reading that post. I think it's PDF if anyone's interested. - And then the last big announcement in November, Guggenheim, which is a very large asset manager, I think they have about 200, 300 billion in total across all of their vehicles. One of their funds, which is a $5 billion fund, they register with the SEC to be able to invest up to 10% of the funds, so up to $500 million in Bitcoin via exchange traded funds by doing that. So what's the net of this? So you've got even just across those transactions, which we mentioned, which are ones of their public. There's plenty more, I'm sure, that we don't even know about where managers haven't disclosed their holdings. You've got close to a billion dollars of inflows flowing in to this asset class. It's not a super thickly traded asset class, right? Like the market cap for all of Bitcoin, as we're running up here is in the-- - 650 billion. - Right, that's it today's prices, but as these transactions are happening, it was probably ranging from one to 300 billion. - Right, and keep in mind only three-ish billion of the 21 billion coins that of ever will be. So there's 21 million total. There's something like 16 million have been mine so far, maybe a little bit more. - Yeah, I don't think so. - But only three million of those are actually ones that are traded. The rest are held long term, lost, whatever. - The Silk Road coins, the Mt. Gocks coins, the Satoshi coins. There's a whole swath of millions of coins that are just gone. They can't trade. Then you've got all the coins that people don't want to trade. They're holding, like, yeah, I'm not going to sell those. - Why would you use this thing as currency right now when it's inflating so much? When it's appreciating so much. It's like you have to be out of your-- You understand the hotler mindset, which, of course, also, which we haven't talked about yet, and I think we'll get into an analysis. You can't really spend your Bitcoin at any retailers. But, of course, you can't, because who is going to spend these things right now? - Right, because so as, you know, what is price? It's the intersection of supply and demand. You've got these huge new chunks of demand, like, a blocks of demand sizes that have never been seen before in the asset class. You know, $100 million, $200 million at a time that want to come in and buy. You've got not a lot of supply willing to sell. Of course, the price is going to go through the roof. So that's what happens. - All right, listeners. As we kick off 2026 now is a great time to thank one of our favorite companies and one that's become pretty essential to how we make acquired Anthropic. And their newest flagship model, Claude Opus 4.5. - Opus 4.5 is Anthropic's most intelligent model. It's state-of-the-art for real-world software engineering and it's the best model for building complex agents. But what's really remarkable is how it handles things like trade-offs and nuance. Engineers at deeply technical companies like GitHub and Cursor and Replet say that it reasons through problems the way that a senior engineer would without requiring handholding. And the new pricing tier at $5 per million input tokens makes this level of capability accessible at scale. - Claude code now works directly in your terminal, in your browser, on mobile and natively in VS code. So it fits into however you work. - And listeners, as an aside, I've been using Claude code all the time now to automate some tasks around acquired like transcription or to help me pull out what I thought were the most important points in episodes when we were actually recording it, when I sort of look back at it a week later and preparing some of the elements in our new revamped email newsletter. - I know, it's been awesome. It's really helped us up level all the stuff that we do besides making the show around acquired. But what's powerful for anyone building something ambitious is the same depth that makes Claude exceptional at something like refactoring complex code bases also makes it great at any analytical work. So coming through regulatory filings, building financial models, synthesizing research across hundreds of documents. - The things that we have to do to make the show. - Yes, yes indeed. - So whether you're shipping the next great product or tackling problems that need real deep thinking, Claude Opus 4.5 thinks through complexity with you, not for you. It's your intelligent thinking partner for whatever you're building this year. - So head on over to Claude.ai/acquired to try Claude with 50% off Claude Pro for three months. And if you want to explore their enterprise offerings, just get in touch with them and tell them that Ben and David sent you. - Well David, as we catch up today, I want to point out there's one institutional firm, Paradigm, that is co-founded by, I think it's Fred Ursham and Matt Huang. Matt of course is former Sequoia partner, Fred of Coinbase co-founder, definitely the president. - Yeah, he was Brian's co-founder, the two of them co-founded it. - And so Matt had made this really great point. If I could tell you to do things to follow up, one is obviously the Bitcoin white paper, remarkably cogent. The other is actually reading Matt's piece about sort of his summary of Bitcoin. It's at paradigm.xyz. And sort of like why we're doing what we're doing, why we think it's interesting, what the trade-offs are, where it could go wrong, where it could go right, really cogent analysis. But one of the things he points out is, of course Bitcoin has these bubbles, but as David mentioned, every time they pop, it sort of plateaus at a higher level than the previous bubble. And because Bitcoin requires this network effect to be valuable, for it is a self-fulfilling prophecy in a lot of ways, it actually uses bubbles as a go-to-market strategy. Where every time there's a run-up, there's more and more legitimate players and more and more institutional capital that sort of pile in, more infrastructure gets built up. And then when the bubble pops and you sort of have a lot of the sort of late coming speculators that of course lose money, what is left there is all that infrastructure and all that advancement that was made from the media and the hype. And it's just really interesting to see that really is a go-to-market strategy. - Well, and what's so interesting about this time, and unique, and we're already seeing this play out in how the price has risen, fallen and then stabilized over the past couple of weeks, is in previous bubbles, it was mostly individuals who are doing this, who are subject of course to individual psychological behaviors and price crashes, like lots of people are gonna sell. Lots of people will hoddle, but lots of people will sell too. This time the demand, the big chunks of demand that's driving up the price, like this is square as balance, this is a microstrategy holding this as a treasury reserve, they're not gonna sell. Like they're investing purposefully as treasury and as diversification. The price crashes 50%, 70%. Like what, they're not gonna sell. They're institutions. And so part of the thinking here is that as we now move and shift into this new phase of Bitcoin where institutions are playing within it, there's gonna be a lot more stability. So what's happened with the price over the last month or so? So we went from 3,700 in March during the COVID liquidity crash to by the end of November, Bitcoin surpasses that all time high of December 2017, hits $19,860 in November, and then by the end of December by the end of 2020 on New Year's Eve, we're sitting at $29,000 for a Bitcoin, which is insane, another $10,000 in a month. It doesn't stop the first week in January, which was last week, even though it feels like last month, it hits 40K for zero. Ultimately the price goes all the way up to $42,000 per Bitcoin before coming back down. Again, several days ago over the last weekend, even though it feels like a month ago, coming back down to a low of about $30,000. So the crash couldn't go, and we could have another crash like we don't know, but this crash is still $10,000 above the previous high. - And is now trading right around 35,000? - Right, which it has for the last several days. So by crypto timelines at least, by Bitcoin timelines, it's stabilized super quickly at this sort of $34,000, $35,000 price. This is very different than the way these bubbles and prices buy out before. - By the time we release this episode, we could be at Bitcoin 15K. - Right, could be at 3K, could be at 100K. We don't know, we may look stupid, but I do think it's really interesting that you have different motivations this time of large blocks of capital that are coming in. - Yep, for sure. Okay, before we transition to analysis, there's like a couple of like today's stats that I think are just sort of interesting, 'cause I continue to be interested in comparing Bitcoin to a company, to a currency, to like a assets under management. So this $35,000 coin price implies a market cap of $650 billion. Well, let's contextualize that $650 billion. So the total consolidated assets of JP Morgan Chase, the largest bank in the United States is $3 trillion. So that's about five times all the Bitcoin out there is like at JP Morgan alone from people who bank with them is five times bigger. Sort of an interesting number to keep in mind. I think Bitcoin, if you were to, it's actually pretty interesting, you can go to the Federal Reserve's website and just look at what are all the settled accounts. Not within each bank, but at each bank, how much money does each bank in the US where the bank charter have on hand, or under their custodian. - Interesting. - Actually not on hand, specifically like how much do they, are they a custodian for? So I think Bitcoin would be like the fifth or sixth largest institution on that list. If it were a bank that was regulated by the Fed, which is kind of interesting. It's also interesting just to compare it to like the market cap of Apple is 2.2 trillion. So four-ish times as big as Bitcoin is, if you want to think about it sort of like how valuable is it versus the most valuable company in the world. Another sort of interesting number to think about it, especially as later we will start thinking about what is the tam for Bitcoin? What's its total addressable opportunity? Not necessarily for a coin individually, but like for what could all of Bitcoin represent to the world at some point in total. And then because we know it caps out at 21 million, you actually can kind of do the math and be like all right, what would the coin value be at that point? So the total money supply of US dollars is about 20 trillion. David, as you mentioned, it was about 15 trillion in January of 2020. So it's gone up quite a bit recently. But again, like Bitcoin about halfway to 1 trillion compared to the US money supply over 20 trillion. Another interesting number to know is that the total money supply of all global currency is about 70 trillion. So there's this interesting or was, I think it's gone up a little bit. So it's sort of interesting to think about like, if you're someone who believes that it's going to overtake all currencies, then you can sort of look at that 70 billion number. If you think it's just going to be a sort of asset that gets held in compare, like it's a part of a portfolio. But a lot of people are likening it to gold. It's interesting. - Which is about nine trillion? - Nine trillion. About half of it actually is in jewelry. So you're not going to replace. Like no one's going to have, actually there is some bit of jewelry. - Tell that to coin daddy. (laughing) - Yeah. But it is interesting to look at like, okay, there's about four and a half trillion dollars of gold out there, not used in jewelry. It could sort of usurp that. It's kind of digital gold. Which, we'll get into all this as we transition analysis here. But sort of interesting to understand the scale of it in today's world. - Yeah, crazy. I mean, it's come a long way from the white paper. Like this is such an improbable journey, you know? White paper to Papa John's, to Silk Road, to magic the gathering to the Winkle Voss twins, to, you know, to Guggenheim investing in it, right? - Yeah. - This is all within 12 years. - Yeah, I mean, it's an improbable story, but you sort of needed all these different factions and all these different vested interests and all these different true believers versus opportunists to sort of push it forward to where it is today. All right, power? - Yeah, let's do it. - And listeners, for anyone new to the show, this is a section that we put in based on one of our favorite books called Seven Powers, which is a study of how businesses can achieve persistent differential returns or put another way to be more profitable than their closest competitor on a sustainable basis. And so what we mean by power here is, what is the thing normally of a business, in this case of a currency or a new money system that basically allows them to outcompete their closest competitors and gives the business for lack of a better word, power. - Yeah, and this is gonna be so fun 'cause I think they're a bunch that Bitcoin has, like a whole bunch. The obvious one that we've been banging the drum on through the whole episode and it's probably the most powerful is network economies, I think. - In particular, versus other cryptocurrencies. Like nothing, Ethereum is the only one that stands a chance and it just kind of has a different use case that's really more around the smart contracts and compute that's sort of built into it. But for sure, like you can't start anything that looks like Bitcoin now and have any chance of beating it. Like it's in the same way that Facebook just outran any other consumer social network, consumer social entertainment type app and then obviously very smart and acquiring those who did get scale. Like Bitcoin just leapt ahead at the beginning of this paradigm. - And I think what's cool is it even applies at the technical level too with this idea of like the amount of computing power going into, that has gone into maintaining and making robust the Bitcoin network over time. - It's itself a compounding asset, right? Like because the more power that goes in over time, the harder it is to crack. - I do. - Yeah, you can't, there is no supercomputer that could conceivably ever be created that is going to, as long as the Bitcoin economy, like a miners keep working, that is going to be able to go back and like redo everything and that lead just keeps getting wider and wider and wider. - Certainly not really old things in the blockchain, but there's always the risk on the newer ones, things that are only two or three blocks behind and unless there's a paradigm change, like unless quantum computing arrives and suddenly you have 10 million X more compute than we did in the past on a single core or something like that. - Well this is also where network economies come into play and Satoshi actually makes this point in the original white paper. Like let's say that happens as long though as the network is big enough and robust enough at that point, the value of the system legitimate, like say you already own Bitcoin. - It's a great point. - If you already own Bitcoin, then your incentivized interest is not to break the system because if you hack it, then people lose trust and then the value of the Bitcoins that you already hold, which presumably if you're a miner, you've already been mining, they go down and so even if you could create more fake Bitcoins for yourself, you have this massive, disincentive to do that as more people join the system. - Yeah, that's a great point. And if the other thing that the system is designed to do is to provide enough incentive, and of course they rebalance this over time, but it provide enough incentive to the miners that if they were to make a call between being a malicious actor and mining, they should make it worth your time to mine, to be white hat. And so if you had access to a quantum computer, they would adjust the software such that it would make more sense for you to mine than it would to attack. - Of course, caveats are bound here. The David and I don't know Jack about quantum computing, except that maybe it'll be a big leap forward in the amount of compute per square, inch or per square, water, whatever. Square walls, I don't think obviously, but per unit. So network economy is absolutely. One that I wanted to bring up that I think is interesting is it's counter-positioned, but not against other cryptocurrencies. It's counter-positioned versus the US dollar, where the definition of counter-positioning, of course with my editorial here, is doing something that incumbents basically can't because they would break their system. - Yes. And like there is no better example than the US dollar. Like if the Fed was like Bitcoin's a really good idea and they felt like actually that's the future, they cannot, the Fed's centralized infrastructure and the US banking system, like the notion of the central federal bank or the Federal Reserve, it is completely antithetical to everything that Bitcoin stands for. Like our monetary supply and our entire banking system exists in a very intentionally coupled manner with our government. And so it's not like it would ever be in the US government's interest to be like, you're right, a decentralized thing would be the way to go because it removes so much of the power of the US government, frankly the US is a nation. - Yep, well, and just like network economies, I think there's another level that counter-positioning applies at too, which isn't just the US dollar, it's at the financial system itself. Like we started the episode with the way banks work and the way credit card companies work, the way traditional financial institutions work is based on this number, bank account number, credit card number system. They can't go back and change that and make it into a public private key thing, like the best that they can do. - Well, I sort of, I think they could. - Well, they could, but all those like, ACHX, are you gonna have, how are you gonna coordinate every bank out there in that talks to every other bank to now all of a sudden-- - Federal mandate. - In the same way that we move to chip and pin. - That's true. - They could adopt a superior and more secure technology if there was enough incentive to do so, but they could not change their centralization versus decentralization strategy, because like, to bring in another sort of mental model, the US government has an L government, who have Fiat currency, have bundled the sort of like, safety, security, and like, amount of normalcy or normality of the nation with money. And like, when people say the US dollar is backed with the full faith of the US government, like, that is literally true. It is legal tender. Like, at some point, if you're like, conducting business on a large scale, and the government's like, can you accept US dollars, please? And you're like, no, like, they do have an army. So, they are intertwined intentionally, and it is strategic to be able to make it so that our economy runs on our government's currency. And that's been a strategy that's worked really well for a long time, and I don't think an existing government, who is the strongest nation in the world, can, like, it's literally a definition of counter positioning. They would cannibalize everything they've built by switching to it. What I'm talking about is more like, this would be hard for the traditional banking system to do, but it's not against their interest to do it, whereas it's actually against totally the US dollar's interest to refashion itself like this. - Yeah, it's funny. In this vein, that delusion idea I was talking about earlier, where I was comparing adding new money to the money supply, to the sort of delusion of your shares in a company, I'm pretty sure that the vast majority of US dollars are actually held outside the US by people that are using it as, hey, this is the way that the world denominates value. It is the, I can't remember what the phrase is, but like the reserve currency I think. - Yeah, yeah. And it's something like 70%, I don't quote me on that, but it's more than half is held outside the US. And so when we do things like print more money, it actually hurts everyone else more than it hurts us. And you can kinda do that to a certain extent. Obviously, if you do it too much, you create a huge problem, and then you create the sort of hyperinflationary thing, and people don't trust it as the global reserve currency anymore. But like, if you're like, you know what, I'm gonna basically dilute everyone by 10%, and they're gonna take the hit a lot more than we are. Like, that's actually what we're doing. - That's actually a really good point, where yes, you're hurting your own citizens with inflation. But you're also hurting these other countries that are who central banks are holding your paper, your dollars. That's something that like your own citizen, there's kinda nothing you can do short of like moving to another country if you're a citizen and you don't like this. But if you're another country's central bank, at a certain point, you're gonna be like, screw it, I'm gonna use a different asset as my reserve currency. Like you can make that choice. - Yeah, and unlike what to roll back to that early Facebook example, when Zuckerberg did the Eduardo Savorin dilution move, where he issued a crap ton of new shares to everyone except for Eduardo, they don't, you can't do that where like, you create a whole bunch of new money. I guess actually that's sort of what we're doing with the federal stimulus. Like we create a bunch of new money and then we only give it to US citizens. - That is. - But like, you can only, - It's like social media again. - Yeah, you can only trot that pony out so many times. - Yeah, okay, I think there's some more in here. - It is a thousand percent of cornered resource. Like, there's a finite number of these things available. So like, it is written into a software and that it's, that you're never gonna increase the money supply. So like, it is quite literally a cornered resource. - Well, it's cornered resource for people who own it. For the system itself. - Oh, that's a good point. Depends who the actor is that you're considering here. - Certainly though, for anybody who holds Bitcoin, like, absolutely. This is the fact that there is programmed in, you know, minimal to, you know, no inflation in the long term. It is an incredible source of value. - Not to mention, it's like the most secure system to ever exist. This public private key pair of things. Think about Satoshi. You got a million and a half of these things and it's so secure that like, people can't even log in to view their own, you know, 'cause they're losing it. Like, it's, you got a super cornered. It's not flea in anywhere. - So I wanna, let's talk about, I wanna explore scale economies. So I think there's scale economies here, but let's talk about it. So scale economies, of course, being like Netflix, like, because Netflix has so many subscribers that they make so much monthly revenue from, they can go pay $100 million for a piece of content and amortize over it over all those subscribers that a smaller service, say like Peacock or whatever, can't afford to pay the same amount for that content profitably. In this case, I think it might apply to the mining pool resources. So like, if people are gonna mine, you could mine any cryptocurrency, right? - Ah, but you can, yeah. - That's gravity to Bitcoin, right? - People are gonna mine yours if they think it has the most potential future upside and staying power. - Right, and because lots and lots of other people are mining and transacting, that's creating, well, maybe this is back to just network economies instead of scale economies. Certainly there is, for, let's look at the mining industry itself, certainly that is a scale economies industry. Now, that's separate from the Bitcoin system, but if you wanna be a miner, (laughs) - Right, the only way you're doing it at this point is with dedicated hardware and a data center in a very special location. - Exactly, like, you're not doing it with a laptop. (laughs) - Right, and it's because like so many people have, like a lot of the value has gotten arbitrage out of doing it by lots of other people trying to do it and it's a race once you find a block. So you have to have the lowest cost structure in order to be a miner. Which is exactly like Netflix and the like, okay, switching costs, what do we think about switching costs? You can exchange in and out of other currencies. So I think switching costs are actually pretty low. - Yeah. - Even as a miner, you can probably repurpose your mining geared other currencies. - There's transaction costs to switching in and out of other currencies, but like, as compared to like ripping out an enterprise SaaS solution in sort of the Hamiltonian definition of it, it's pretty low switching costs. - I don't think there's process power in any sense here. - No. - I think the last question is branding. Would you rather say you had $1,000 to invest? Would you rather do you put that in Bitcoin because you know and trust Bitcoin versus something else? - I mean, I would, but it's more because of the network economies. It's because like, I feel like if there's going to be a dominant cryptocurrency that is a huge part of our global economy, 20 years from now, it's going to be Bitcoin and it's not because of the brand. Like, it's not because it's, yeah. - If something else had the same properties and dynamics and network behind its system and it were called something else, yeah, I don't think I don't think there's any brand power there. - Yeah. I think the last thing, the last thing to talk about in power that I should have talked about when you were talking about network economies is again, going back to this comparison to the US dollar, government backed currency has an absolutely enormous head start on their network economies power versus anything else. Like the government mandates that you pay your taxes in USD. So automatically, it means that like every single person in the country must own some amount of USD in order to pay their taxes in it or at least they have to, they have to use it. - Or maybe they're like accepting their wages in it. So money is flowing from literally every person in at least one direction in that currency. So like that lights up a bunch of nodes on the network. On the other hand, the government pays its debts or its bills in that currency. So like, it's getting paid out to every other country, it's getting paid out to every contractor and like the government contractor industry is actually like a, it's a large part of the US economy. I don't know. - Oh, totally. I'm going to be so happy. Let's consider a government contract to lawyer, government contracts lawyer. - Oh nice. Yeah, like it is, I don't know if I should be nice, but yeah, it is a huge segment of our economy. The government is the customer. And so you, like, it's incredible. Anything can ever compete with government backed currency given how many nodes on the network are already by default dealing in government backed currency. - That might be a good transition out of power into our next section. - Yeah, so listeners, what would have happened otherwise is our next section. A lot of times we like to look at a specific event and wonder if it had gone in a different direction. We may do that here, but we want to adapt this section to basically say, like, let's compare all the weird ways that Bitcoin works to the normal fiat currency system, the USD and sort of compare and contrast some of the elements. And the way that I sort of want to start is like, what is money? Like, what is the purpose of money? And now we're getting a little bit, I suppose, academic, but it is three things. It's a unit of accounts. So it's the way that we basically say, this thing is worth that much. Like, when you look at, you know, gallon of milk and you, in your head, it sort of occurs to you how much it costs, that's the unit of account. It's the way that you account for the world. It's a store of value. So, you know, I made some money. I put it in a savings account. That's denominated in cash. I'm going to come back and use that in the future. And it's a medium of exchange. It's the way that I buy apples at the market. And of course, then currency is sort of, in some ways, a subset of that. It is literally like, money in the form of however you pay for. So in the form of paper or coins, generally, you buy government things like that. And I bring this up because I want to talk about this phrase that people throw around in Bitcoin bubble and that we've talked about on this show. So if someone were to say me, Bitcoin is a bubble. I would say, for sure, like no doubt it's a bubble. Also, so is USD. It's just a really long bubble. Like, how would you define bubble? And I, again, I'm going to, I'm going to quote Matt Huang here from his memo, because I think it's super good. His comment is, we can think of money as a bubble that never pops or at least hasn't popped yet. And the value of fiat currency gold or Bitcoin is relying on collective belief. Other factors, like a government's power, the industrial utility of gold or the robustness of Bitcoin's code base can help reinforce this belief, but this belief is critical. And I think there's something really interesting as we think about money or currency here. It's not like a stock where, sure, you could say like, oh, Tesla is a bubble, because it's relative to its current positive cash flows or any reasonable future positive cash flows that it could have, like you could argue, like it's trading way too high above the sort of utility or intrinsic value of what you're entitled to as a shareholder of that company, and you're entitled to the future profits of it. Currency definitely has no intrinsic value. Like it literally, the only thing that gives it value is the collective belief that other people will continue to value it in the future. - Right, well, this is where you get into exceed our macroeconomic academic and history depth here quickly. But yeah, this is the argument, like before 1971, there was some argument about the US dollar that it was pegged to gold and that you, you know, you couldn't get as much gold as you could buy for a dollar if you turned in a dollar, but you could get some gold. Like there was some thing. But then after 1971, when Nixon signed that away and the US went off the gold standard, yeah, it's just there's no different than Bitcoin. Like it's just, there is no tangible thing underneath it all, other than your belief in the robustness of the US government as a system. And hopefully I think what we've laid out on this episode is that with Bitcoin, it is the same. You are believing in the robustness of Bitcoin as a system. - Yeah, it's a, it's really interesting. Like, you know, currency is anything that we're comfortable sort of using as this way of, again, the three points are a unit of account, a store of value and a medium exchange. So like most things actually are a pretty crappy form of currency, if you can rip a dollar and half too easily, or you know, if anybody could copy it and they didn't have serial numbers, there's a, I'm gonna, I'm gonna keep quoting Matt here 'cause it's just so good. But he says, as with any monetary asset, Bitcoin must be scarce, portable, fungible, divisible, durable and broadly accepted in order for it to be useful. Bitcoin rates strongly across most of these dimensions, dimensions except for broad acceptability, which of course we've sort of talked about with the network effect. So like, the dollar is that. If I had to sort of score it, scarce, it's like it's reasonably scarce, so the issue is monetary policies, yeah. Portable, certainly, again, not as portable as Bitcoin, 'cause like if you wanna carry a suitcase of a million dollars, it's kinda hard. Fungible, it certainly is that. I mean, any dollar is kind of the same thing as any other dollar. Bitcoin, I don't think Bitcoin wins at all on fungibility. Divisible, they both have a tiny little unit. There's cents, which represent the smallest amount that anything could really be worth, or there's Satoshi's, which is 1/1000 of a Bitcoin? 1/10,000? - No, no, no, it's less than that. It's one, I think it's 10 to the eighth, 10 to the seventh, or 10 to the eighth, negative, negative seventh, or negative eight. - So we may have to come up with something smaller than that if Bitcoin continues to sort of rise. Durable, certainly. - You'd have to go a long way from here. - Totally. Durability, I mean, Bitcoin is like way, way more durable than US dollars. Like we rotate dollars out of the system every once in a while 'cause they just get too rady. And like that's, you hear Bitcoins are not gonna degrade on a hard driver and cold storage somewhere. So there's this interesting, you know, basically in everything except for broadly accepted, Bitcoin sort of wins. Now, again, that thing we talked about earlier with the US dollar having this overwhelming, unbelievable head start on the network effect. Like TBD, if Bitcoin can actually, even though it's better in all these ways, can it actually fight that? And I think an open question is, does it need to or can it sort of exist as a complement alongside? But there's three more features that Bitcoin has that USD doesn't, which, and again, going back to Matt Huang here, it is digital, programmable, it's actually four, decentralized and censorship resistant and universal. And I think that's where you start to get into this like daydreaming about finally a currency for the internet. Things like smart contracts, which you can do on a very limited basis with Bitcoin, you know, that it's digital first where you, you know, you're not saying, like, I'm transferring you some money, but like, wink, wink, it's on credit and I'll make good on it later. Like, you're literally instantly, or within 30 minutes, moving money from one place, you know, from one account to another. The decentralized and censorship resistant, it's very interesting, five, 10 years ago, I would not have been a person that's like, oh, that's super important in money. But like, I think everyone's confidence has been a little bit shaken by recent events and like, wow, actually, maybe I do want a hedge. Like, maybe I do want some amount of hedge in case-- - That'd be clear. Certainly recent events in the US, like the capital happening, not, but also recent events in China and all over the world. Like, it's hard to think of, maybe except New Zealand. I think New Zealand's doing on the rise, but it's hard to think of other governments where like trust isn't going down around the world right now. - And if you're from Argentina or Greece or anywhere that's had sort of a currency crisis in the last few decades, you're probably jumping out of your seat right now going, you stupid Americans. Like, get this through your head. Like, this stuff happens. Like, just 'cause you guys haven't had it happen yet. Like, it doesn't mean it's not gonna happen. - That's true. I skipped over it in history and facts, but a huge moment for Bitcoin was in 2013 when Cyprus went bankrupt and defaulted and nationalized parts of like bank accounts of citizens. So like, let's get this clear. Here's what happened in Cyprus. If you held over the equivalent of like $100,000 in a bank account in Cyprus, when the Cyprus government defaulted, they reached into your bank accounts like I was saying in my nightmare scenario when paying my taxes and they just took all your money over $100,000, they just nationalized it. - Holy crap. - And that happens in the world. And so like a bunch of those people like, and around the world were like, holy crap, like, I see now, I want Bitcoin. - Yeah, that's wild. - So that's sort of how I wanted to go about, in this comparison that we often make and what would have happened otherwise, this is sort of my Bitcoin to USD comparison. And that might not be fair. Like I think as we move forward here, and David, you have a little bit more context here than I do, the right comparison may actually be to gold, not to USD. And at least at this point in Bitcoin's development, it might be less about, can I use it at retail opportunities and more about, hey, can I at least count on it being a good store of value? - Yeah, I mean, that's the thing I think. Well, we'll get into this in grading and how it's performed across different dimensions. But I think most people, certainly all the institutions that are coming into Bitcoin right now, they're not thinking about it as versus USD. It's not an OR, it's an AND. Like, this is a good store of value. I'm worried about inflation in USD and other relatively secure assets. Now Bitcoin has tons of volatility, but it's got upside and it's not going to experience inflation. Great, I'm going to view it like I view gold. - And by the way, did you know gold's money supply increases? I think it's like from finding new gold every year, but it's like one and a half percent. Like it's literally from mining, they're adding to the gold money supply. Obviously not at the whim and in such great volume as USD is, but one thing that Bitcoin proponents would espouse is that already, even with, we're only 12 years into this or 10, 9, 11 years into this, already the money supply increases by less per year than gold does. - Oh, interesting, I didn't see that. - It's like 1-ish percent versus 1.5 or 6 percent. All right, what else in what would have happened otherwise? - I mean, we could talk about interesting things like, what if Silk Road, what if DPR hadn't gotten arrested or still operating, what if Coinbase and Gemini and the like hadn't been built and we were still all running on Mt. Gox? I don't know that those are that interesting. I think those are, they're kind of like any company story we tell where it takes a lot of luck along the way. You gotta get the lucky breaks to keep going and Bitcoin certainly had that. Why don't we move on to playbook? 'Cause I think actually a lot of those, for me, feed into one of my big playbook themes. - Cool, well, my biggest one was definitely this notion of bubbles as a go-to-market strategy. My second biggest one is, again, I'm just like so entranced by the beauty and simplicity of reading the white paper. There's something rare that happened in Bitcoin that I don't think happens often, which is just a small set of very clever, very simple inventions working together, unlocking a tremendous amount of new value. And they built on shoulders of giants past like public key encryption and one-way functions. And certainly the proof of work from hash cash and other people that had come before. But I mean, the notion of a blockchain, incorporating elements of the things that came before in sort of a tight and near-perfect system is really a marvel. Like no matter how you feel about Bitcoin and everything that's happened because of it, it is a beautiful system. It is, I mean, we were talking about this before we started recording. My first reaction in rereading the white paper for this was like, there's got to be more, like there's got, it's only nine pages. I was like, oh, well, there's got to be a bunch of stuff that they're not describing that like other little like things and hacks and stuff you need to do to make this work and like, what about this case? What about that case? But then you think about it. And there is with like increasing the block size and like these forks that have happened in years. There was forks, yeah, all this stuff. But like so small, like so relatively few things. Like you can probably count on one hand the number of like additional modifications to the system that have had to be made over the last 10 years that weren't captured in this nine-page document. It's incredible. - Yeah, it is. I think the biggest change that Satoshi did not foresee that will need to happen is the one that's going on now and the one that hasn't really been implemented yet where Bitcoin was initially kind of created to replace the payments layer on the internet and first and foremost and create a low transaction cost payment system with no fraud. And as you sort of dive deeper and deeper, you realize it's actually not great at that. - Right, like what it is in its current form because there's so many people who want to use it, it's kind of like, it's kind of existing at a different level of the stack. Like if you look at the like money stack, there's kind of like, well, like there is the US dollar and then on top of that, there's like the Federal Reserve and on top of that, there's like the central banking system and then like there's your account at the bank and then there's like, you know, credit cards and stuff. And like, it's actually not a great credit card but it is a pretty good bank account or like one level deeper where it's like the rails that like the central banks all work on together. And I think like what we're seeing is that and this is where I think there's gonna be a lot of debate within the community and I've only dipped my toe in to really understand this but it's very clear that like the blockchain, the Bitcoin blockchain as it exists today is gonna be for like moving large amounts of secure value around infrequently and what needs to be built is still sort of like Bitcoin's credit card. - Exactly, that's so funny. I was thinking the exact same thing over the past couple of weeks researching, which even though with how we started the episode, like you said, the original goal was like make native money for the internet and fix payment rails and whatnot. Like, yep, this is not, the realization to me was like, yeah, Bitcoin is like the bank, it's like the central bank plus like your bank, it's not gonna be good as a credit card and that's okay because other internet native systems can be the credit card on top of it, stuff based on, you know, DeFi projects based on Ether and the like, well, they will cover all this on another time on acquired but like, that's okay if the credit card, like the rapid transaction layer in internet native cryptocurrencies is different than the bank account layer, like one, you don't need one ring to roll them all here. - Yep, that's a great point. - As long as you can port in and out just like, you know, when I pay my taxes, I pay them out of my bank account but when I buy something at the store, I go hopefully someday again out to eat at a restaurant or I order on DoorDash, I pay with the credit card. That's totally fine. I'll do stuff with an Ethereum based, you know, DeFi projects for rapid transactions and I'll move money in and out of that as needed from Bitcoin wallet. - One thing that I've been increasingly thinking about as we've done these episodes is trying to factor in more of my why now to our playbook. Like why did this happen when it is happening? And for Bitcoin, I wanna talk about this idea that Nick Zabo brought up, he and Naval were on an episode of the Tim Ferris podcast that will include in the sources here and I haven't been able to shake this idea from my head. So we've been obsessed with making computing more efficient over the last several decades and frankly we've needed to because we could clearly come up with reasons why we needed more compute than we had. The use case is definitely outpaced what the hardware was capable of. And Bitcoin is one of the first times that we deliberately want to and have done something that is computationally extremely inefficient. And when you think about it, Bitcoin requires tons of computers to do the same slow actions to check each other's work, to propagate this blockchain all over the globe, over and over and over again by like, it's the many computers doing the same work 'cause they're sort of voting by doing the work, which will have environmental consequences that we're gonna talk about just before grading. So it's expensive from a computing resources perspective, but if it really does unlock new value for humanity, you can think of it as like a clever way to take advantage of the orders of magnitude more compute power that we have now to do something that is potentially a fundamental breakthrough for humanity. And it's interesting to try and apply this lens and think, well, what else could you accomplish that was previously thought to be impossible from a system perspective by leveraging this incredible scale of computing in a very inefficient way where we're basically like, I think the way that Naval put it was like our brains haven't gotten, haven't become any better computers, but we've developed way better computers. So how can we take things that our brain currently, or hasn't been able to do for all these millennia and figure out a different way for the computers to take on the work, not in a super efficient way, but in a system-wide new use case way. So like, it's a little out there, but I definitely-- - Well, I think that's a lot of like a theory of way. We'll talk about that when we do it today on someday. - Put the pin in that. - Put the pin in that first, sir. - All right, David, I have one more, but you go first. - Okay, cool. I had one big, well, I had two playbook themes that I wanna highlight. One, I wanna be not careful here, but specific. I think this whole story really illustrates for me when you are pursuing a network effect, a network economy based power business, like this is, like Facebook is, like most social networks, and the like like Airbnb, two-sided network effect. In the beginning, what matters is getting nodes and usage on the network to start. And so it matters less what they are doing, and more just that people come on board and that your value grows according to Metcalf's law. And then as it grows, more sets of users and use cases will come on board and it will evolve. And so like in Bitcoin's case, this is why I said, I wanna be not careful, but specific. I am not in any way condoning what happened with Silk Road or that that's okay or that that should happen or anything. But just from the perspective of value building of the network, the fact that it happened, like transactions needed to start happening, nodes needed to come on the network for users and for miners. And Silk Road provided that as the bootstrap, the first use case, and then there were more after that and one thing led to another and now here we are, here we are is so radically different than what Silk Road was, you know? But for the underlying like network and the protocol, it doesn't really matter. What matters is increasing your velocity and growth of users and transactions. And so then I look at Facebook when I look at Airbnb, it's actually the same story. Like what was Facebook in the early days, as we've alluded to, it was like undergraduates at colleges looking for attractive photos of, you know, other incoming undergraduates at their college, is right? Like that is so different from Instagram and WhatsApp today. - Right. But that's okay, like that's similarly with Airbnb, like what was Airbnb in the early days? It was like people sleeping on air mattresses in each other's apartments. - Yeah. - What is it today? It's something wholly different, but the point is going the network. - It's funny, like on the one hand, yes, you are totally right. On the other hand, I'm like sitting here thinking, and this is not really advice, it's just an observation. I think like many of our playbook themes, if you were starting a startup, David, and you came to me and said, I'm gonna eventually do this thing. And before that, I'm just gonna do a bunch of random crap, but people are totally gonna use it a lot. And eventually, once they're all using it, then I'm gonna make them do this other thing. I'm gonna be like, no, like that's extremely unlikely. - So I do think there's some, I think there's some applicability here of like, - Yeah, totally. It's not totally apples and oranges there. - You stare step up. I think I think Ben Thompson had an old article about this with Snap and Lattering. Like, you ladder up from like, oh, disappearing text messages to like, you know, a broader social network. And so I do think you can be very strategic about this. I think it also matters for investors who when you see something like this that's a network effect, like, it's so easy to write off Bitcoin because of Silk Road. But like, if you step back for a minute and you're like, wait a minute, is there a chance that this is just the first set of applications on this network? Is it there a chance that people sleeping on air mattresses in these other departments is just the first set of, you know, use cases on this network? And that that'll bring in and attract the next set. - Yeah, fascinating point. - And then the second theme I wanted to highlight, which is smaller and also sort of tarnished just because of the ICO thing. But is I think brilliant and new about crypto and new crypto projects is if you can reward and incentivize usage of your system by value within the system itself, like with the mining setup of like the rewards for mining, our Bitcoin is the work done by mining. That's super, super powerful. Like now there's an incentive in and of itself for people to come in and use your network. - All right listeners, this is a great time to thank our longtime friend of the show, Vanta, the leading agentic trust platform that helps you automate compliance and manage risk. David, I caught up with Christina and the Vanta team to get the latest. - Oh nice. - So listeners probably know Vanta started by focusing on compliance automation. So helping companies to get their SOC2, ISO 2701, GDPR and HIPAA. The big insight was to build a system that could monitor all of your compliance and risk continuously, not just once a year for your audit, so you could feel confident in your security posture all the time. But now they have realized that the business that they're really in is making it easier for you to earn the trust of your customers. - Mmm, yep, makes sense. - So when you start scaling, you end up with more compliance and security requirements and more tools which can get very chaotic. Vanta has become the always on AI-powered security expert that scales with you. And as Vanta puts it, they are the best security hire you'll never have to make. And of course, the fastest growing companies in the world like Cursor, Snowflake, Repplet, Linear and Ramp, all use Vanta to make sure that their security programs are always a step ahead and function as a real driver of growth for the business. - Makes total sense. It's funny, when we first started working with Vanta almost five years ago, I think it was, we thought, oh, this is one of those great acquired universe products that lets you focus only on what differentiates your product and outsource the things that don't. But over the last couple of years, their product has advanced so much that it's not just Vanta does that for you. It's now actually Vanta does that better. Without a real-time monitoring system, there's just no way that you could give your vendors and customers this level of confidence and trust. - Yep, so if your company is ready to go back to making your beer taste better and leave the compliance and security reviews to Vanta's AI-powered automation, join there now 12,000 customers around the globe. You can just head on over to Vanta.com/acquired and tell them that Ben and David sent you and you'll earn $1,000 of free credit. That's Vanta.com/acquired. - All right, well, David, if there ever was an episode that we need to discuss, the difference between value creation and value capture is this one. This is normally a two-part section. I'm gonna ignore the one about do they capture enough of the value that they create? 'Cause I think we'll leave that to listeners to Ponderon based on everything we've already talked about in this episode. I absolutely wanna talk about the comparison between how does the value created for the world, not just shareholders or potentially coin holders, compared to any value destruction that they have created by existing. And of course, we've already talked about all the sort of illicit uses of Bitcoin. Again, I'll leave that to further ponderance by the listeners. But I wanna talk about the scale of the environmental impact 'cause I surveyed some friends like, what do you wanna know about Bitcoin? And one friend texted me and said, well, is it bad for the environment or no? And it's a good question. And the answer is kind of like, well, relative to what? Because sure, does it use computing power? Absolutely, like how much? And what do other things use? So here's at least some estimation of an answer. In 2019, MIT tried to answer this question by commissioning a study. And they basically said that Bitcoin mining specifically accounts for about two tenths of a percent, 0.2% of global electricity consumption. And it produces about as much CO2 into our atmosphere as Kansas City does, as just like a ballpark, so like a whole city per year. And some estimates actually put it even closer to 0.4%, to almost half a percent of the world's energy production. So on an absolute basis, for anybody who actually knows-- A whole lot of energy. Totally, who knows their climate? This means 23 megatons of CO2 are put out into the atmosphere per year because of Bitcoin, which another comparison is between, if Bitcoin were a country using energy, it would be right between Jordan and Sri Lanka in terms of their greenhouse gas pollution. If you include the other cryptocurrencies, mostly Ethereum, that actually doubles, help you estimate how much energy is being used. So I think the answer is a lot. I think there was other studies that have been done that shows that mostly their mining facilities are using renewable energy. So it's not like it's necessarily consuming coal, oil, and like the central basin in Washington. That doesn't change. It's still like that's a lot of energy. Right, energy is fungible, not as fungible as money, but as fungible like money. So if these data centers are using that renewable energy, then it means that other places are likely to look toward coal or to oil. And so yes, it's making an impact in our greenhouse emissions. And that glorifying the system should not come without the discussion of is it worth it. And I think listeners, you make the call of whether you think that all this utility that this new monetary system has brought, is it worth it if we race toward raising the global temperature by one or two degrees Celsius over the next 10 or 20 years? I don't know, and I think that the jury's out. I'm not sure there's really much we can do about it. Again, it's a decentralized thing. So what are you gonna do? Tell people-- - Well, there's also a question. I certainly haven't done the work to know. I don't know if you have of how much energy does and emissions does the traditional finance system produce. For sure, it's also a lot. I bet it's a lot more. - Yeah, so here's an interesting sound on that. A single Bitcoin transaction. Now, remember, we talked about these. These are really ideal for like big secure transactions, not credit card transactions. But in some way, there's a lot of smaller transactions that are being used for today. A single Bitcoin transaction consumes more energy than 100,000 visa transactions. - Interesting. - I mean, if you think about all the computers that then have to go and verify that proof of work and stack it at the next level in the blockchain and propagate it out, it makes sense. A centralized system is way more efficient from an energy consumption perspective. - Yeah, that's a good point. Then there's also like, I think the other dimension to this question is not that we're gonna be capable of or choose to talk about a certain side here, but it's just a political side of this. There's probably a reason why currencies and governments have been tied together for like four, 500 years. This is separating that out. What are the consequences of that gonna be their large? - It's an unbundling of one of the major components of the services that a government provides in order to ensure a stable society. And will societies that you currently think are stable stay as stable if they don't also have control over being the, if they don't own the fiat currency? - Yep, totally. So that's a question. Then there's stuff like the Cypriots in residents of Cyprus. Like they, you know, if those people had owned Bitcoin instead of had their deposits in a bank, wouldn't have been able to be nationalized. Or if you live in a country where certain things are illegal that may or may not be right to be illegal, you can now have a vehicle to transact with them via Bitcoin that you couldn't otherwise. But yeah, there are also a lot of downsides too. So thorny, thorny questions. I think the point that was right there, like the cat is out of the bag here. Like the, these are philosophical questions. The real questions are gonna be just like what, how will history play out in the coming years? - Yeah, and this decoupling from government is interesting because for the average person, it is way, way, way better to live in a stable society versus an unstable society. Like government provides an enormous amount of value in our lives, ensuring you at least know what system you're operating within. So you generally don't have concerns about safety or about someone screwing you over in one way or another. Or, you know, just provides like reasonable guardrails so that you can do higher level functions in life. And like if you wanted the flip side of that is with stability comes sameness. So if you're part of a group that's been oppressed by a government, and maybe that's been the case for hundreds of years in your country, then like you're gonna keep being oppressed systemically. And it would be better if you lived in a more dynamic nation where you could do more things to break the system and rise up and get power. But I think these are sort of two sides of the same coin. And if you see government owning less and less of the sort of core components of a society, the first of them being money, you will both see the destabilization, which is worse for the person who benefits from the stability. But also you will see greater opportunity for those who are oppressed to be unoppressed. - One last thing that actually is worth calling out here on a separate topic. This is, we're gonna talk about this in grade again a minute. This is probably the best. If you were to categorize Bitcoin, look at it through the lens of like acquired lens of like a venture investment. This is probably the best venture investment of all time. Like a three million X, like what, there's nothing that's even close. Like this is just like hands down. Okay, every other investment like that, probably in history has just solely been the realm of institutions. Like you could found a company, you could be Mark Zuckerberg, or you could be Excel and Founder's Fund that invested in the early rounds. And as an institution like you and I couldn't do that. Bitcoin. - Oh yeah, totally. - Can participate in this. - Yeah. - In fact, the institutions have been locked out until now because the scale wasn't big enough for them to participate. - Yeah, put another way, asymmetric upside opportunities are typically only available to frankly wealthy people. Like venture capitalists, those who invest in venture capital funds, accredited investors, people who are able to get in early on these companies that could be the next Amazon. And very rarely is there a public company that has that kind of upside left in it. Of course, Amazon is the example where there actually was that much upside left in it. People are perceiving that to be the case with Tesla. So, but I think the point you're making is that like, oh my gosh, look at this. This was a retail investment available to consumers at any scale. - And. - And we will have this type of asymmetric upside. And when I say asymmetric upside, I mean like, sure, you're gonna invest in a stock and oh my God, if that stock 10Xs, that would be amazing. But almost never are you gonna buy a stock and it's gonna thousand X, the way that Sequoia did with Airbnb. And I don't know, I have the number off the top of my head. But you know, in that sort of order of magnitude. - Yeah, so I think that's like interesting. - For sure. Value creative for those who did so in the pre-2013 era. All right, grading. - All right. - David, how on earth are we gonna grade this one? - Oh boy. Okay, well, I think we already, unless you disagree then, I think we knocked out number one, which is like, how would you grade an investment in Bitcoin? Like this is-- - It's by far the greatest investment opportunity of all time in humanity. - Over the past 10 years, for sure. Okay, that's easy. That's not that interesting. There's, how would you grade Bitcoin in its sort of original purpose as laid out in the white paper of becoming a native internet currency medium for transaction for the internet? I think the grade is actually pretty poor here, relative to the initial intentions. Now that said, it could prove with the 20-year lens, let's say we're sitting here in what would that be, 2028 from the white paper's initial beginning of the authoring that it actually works really well if they can figure out this other layers of Bitcoin and how they sort of interact and how you can do much more higher velocity, lower value transactions in a cheap way. Like, it may be the case that it ends up great, but like so far, no, it's been pretty poor for that. - And Bitcoin itself. Now, I think very likely, if there's no Bitcoin, there wouldn't have been any Ethereum and Ethereum and its derivatives, probably in my view right now, stand the best chance of building that layer. So maybe it's responsible, but Bitcoin itself, no one probably never gonna be. - Right, I can check out on overstock.com, but it's kind of about it. - Yeah, interestingly, so Stripe supported Bitcoin for a while, but then once it became clear that it was too slow and too unwieldy and transaction costs were too high for high velocity transactions, they dropped it in 2018, they stopped supporting it. - Interesting. Well, that's definitive. Like, it's a D or an F for its initial purpose so far, but when did it stimulate innovation in that area? - Yep, okay, next. Oh, I was gonna say we do store a value next. That's probably related to being an investment. - I mean, it's been an amazing investment in a highly volatile store of value. - Sort of value, right? So it's not a, it's just like anything here, like investing in value depends on your time frame. Like, if you have a multi-year time frame, amazing. Best investment of all time. If you need this to function as something like a US dollar where like, hey, I need to pay my taxes next quarter, I wanna make sure that I put this money away so that like, I know I'm gonna have that money to pay my taxes next quarter. Not good. - Yeah. To me, from a store of value perspective, it's a great hedge. Like, there still is the probability that it loses 80. There still is a reasonable possibility that it loses 60, 70, 80% of its value in a short period of time. So like, am I calling my parents and telling them you should put your retirement in there? Like, absolutely not. Should you be building it into your portfolio maybe? Like, again, gold continues to probably be the best comp. It's like gold with a bunch of upside. Feels like, well, it's a higher volatility there. - Right, it's if you put money into gold, I'm probably gonna be able to pay my taxes next quarter with by converting that back out. - That's a fair point. Yeah, it's super high volatility gold. And again, I don't know that it's like, I don't know if there's alpha there. Like, there's just as much upside as there is downside. - Yep, yep. But I do think over the long arc, there's a lot of upside very likely. And especially in this, we'll get into our last greeting lens here, especially compared to cash, which, and zero interest rate environment, plus an inflationary environment, where you are losing money in the long term. - Not to mention, dilutive from the money supply increasing as much. You will, unless something drastically, drastically changes, you will assuredly lose purchasing power by keeping money in cash over any extended period for the foreseeable future. Bitcoin knocks it out of the park relative to that. High volatility relative to that cash, but yeah. Yeah, it's a really good point that like the, the, you know, old aphorism of like, I'm gonna keep cash around in case, you know, there's a recession and I have the opportunity to buy up like that cash is just losing value faster than it ever has. Like, we're not in a hyper inflationary environment, but like, relative to where we normally are, it's not, it's certainly, you certainly can't put it to work in a great way without taking meaningful risk. - Now, I will say, we don't have the lived context of the 80s in America, where interest rates are in the teens and like that, talk about inflation, that's insane. You're losing 15% purchasing power every year. That's crazy. So we don't have that context of lived experience, but it's just like, there's just no rational way that I can think of to look at why in like longterm holdings that I don't need this cash right now and I can afford to be longterm focused with it, I should have it in cash that just seems, like there's no way to win there. - Well, the last way I want to sort of analyze this is through the venture investment lens of is there still enormous upside in this investment? And I was kind of thinking about this like, so we saw a 35,000X in the first five years. Then we saw an 85X in the five years after that. And even to get a 20X in the future, that means a single Bitcoin would have to be valued at over half a million dollars. But. Which the Winkelvast wins are on record saying that that's there essentially priced target for Bitcoin is 500K, which would be parity market cap with the above ground gold. Like if Bitcoin had the same market cap as. - Right, that's what I was gonna, yeah. That's what I was gonna go here. It's sort of silly to like think about like, what could I imagine a Bitcoin being? 'Cause you can't, it's arbitrary. The interesting thing is if I owned the share that I would own of all the Bitcoin in the world, which you can calculate. And Bitcoin's market cap was, like this is what I'm saying, I'm analyzing like a venture investment. Do I think this thing has a chance of sort of being a 20X here? And the answer is probably. Like if I probably think that, or the answer is yes, I do think that, because if it's got this half a trillion dollar market cap today, and the market cap of what people are doing with similar products like the US dollar, is there's 20 billion of those. There's 70 billion dollars worth of that globally. There's five-ish billion dollars of gold, and that's its sort of closest comp. Like do I at least think it can get steel more of the gold market? Yeah, totally. And that gold market is, even without jewelry, 10 times bigger than its current market cap. So do I think it has a 20X in it? It could, it has the possibility of that. And in a venture return, you're never underwriting to, yeah, I think this is going to happen. The year underwriting to, if it happened, would it be sufficiently large enough? And am I willing to put together a portfolio of those if it happens? And just make sure that all of them clear the hurdle of, if the one or two they're enormously successful, are successful, will it be big enough in order to make the whole portfolio worth it? And yes, I do think this has enough running room in front of it. All right, let's, I'm going to bring it full circle for acquired here. The pre-2011 era for Bitcoin was science project phase. The 2011 to 2013 era was like seed investment phase for Bitcoin. You invest in Bitcoin during that phase. It's like being a seed investor in Google or Facebook or whatnot. The 2013 to 2017 period was the series A, series B. Stage investment year like, you know, especially if you go later in that spectrum, you're like Graylock coming in and doing the series A of Airbnb at a $60 million post. Super high at the time, that seems crazy. Well, yeah, they made a lot of money there. We are now in the growth round phase of Bitcoin. Oh, you don't think we're in the post public? No, no, no, no, no, no, because they're still all this upside. Like will they, they're still, like you're investing in a growth stage company, right? Like you're doing a series C in-- Yeah, you're investing in Stripe right now. Like that's actually the reasonable comp is like-- Oh, no, I don't think we're there yet. 2020 Stripe. Well, so here's why-- Either in 2017 Stripe. Here's why I think we're in 2020 Stripe. Because Bitcoin, after it, in our little playground here, would go public, it still has like, because the TAM is so big, it's Amazon like in that way, where like it still has a ton, a ton, a ton of growth potential in front of it after it's sort of like mainstream and accepted by, you know, all the people that would be interested in buying a, you know, robust IPO. And also, it's not a company. It's way bigger than that. Yep, yep, yep. I guess that's sort of where I would talk now. Oh, this is great. This is so great. I think we're going to, we're viewing it the same way, but we're going to disagree on what stage. I think it's Stripe in 2017, because I think this is like a series C-ish in a company. The path that you laid out of the path to gold, high execution risk, whatnot, but like that's the upside. Like it accomplishes that great-- I think that's the IPO. It's gold with more utility. So like it's not hard to imagine why they would be able to pull that off. But here's the Amazon. What the case, you, I think in my mind, we can disagree about where we are in this. They're still upside to gold. It may be low likelihood, but is like, Amazon went public. It was a bookseller. Amazon today is AWS, and Amazon, right? The upside is, it becomes more than gold, and starts to eat into reserve currency, et cetera, et cetera. So I think that's, I think there's still another after Brewster stage on this. Whether it'll happen or not, I don't know, but I think you could view two tiers of upside left here. One is realize the gold thesis. Two is expand beyond gold. Well, because realizing the gold thesis is only another 10X. Right. Yeah, it's like a 15X. Well, I'm not counting-- I'm not counting the part of gold that's dedicated to jewelry. Oh, yeah. People holding gold as a store of value. Although jewelry is a store of value too, it's just inflated because it's prettier. All right, I really like that analysis. I think that's a great place to leave it. I haven't checked the time. I have to imagine this is going to be the longest acquired episode in history. So listeners, thank you for going on this journey with us. David, I didn't expect, frankly, us to do as much as we did looking both at the history and sort of this strategy pull apart and some of the technical aspects. So I hope listeners, you enjoyed all three. We'd love feedback, particularly if you are an economist or in this ecosystem. Or if you know about moves that have been made in this ecosystem that we don't know about yet, I think we like to continue learning in public. So please, please reach out. Well, for folks who don't know, we have started codifying the playbook from each episode in some written bullet points. We did that for this episode as well. And we email those out after posting each episode. So if this is something you want, you can sign up to receive the playbooks at acquired.fm. 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