I’ll tell you after reading the book, and after seeing the technology that exists for this, I really do think that. And I think you already kind of see this, but it’s just kind of a mirage for a lot of people that whenever I send money to Stig in Denmark, it’s not actual dollar bills being sent anymore. 

Also, I think that a lot of people have actually been experiencing a form of cryptocurrency in a way, but they really don’t necessarily recognize it for what it is yet. And I think it’s only going to get more dramatic as time goes on based on some of the stuff that we’re reading in this book. 

So, what’s the purpose? Why did Bitcoin and cryptocurrencies emerge in the last five years, call it? And there’s really two main reasons. And the first one, I’m going to talk about. The next one, Stig will talk about. But the first one is that governments cannot increase the supply of this cryptocurrency. 

And so, that might sound like a really far fetched idea for people because it’s bits of data. But how they’re actually doing this is they have an open source, and we’ll talk about this more later on, but there’s open source program algorithm. 

It’s open source, meaning that there’s a group of people that work on it. It’s just not one person. And, what they’ve done is they’ve programmed the algorithm, so that it cannot produce more units or coins, if you will, of that system. Let’s just say there’s 100 coins. Let’s use an example of myself, Stig, Hari, and Calin. The four of us. And if there’s 100 coins, and we divide up those hundred coins, each person has 25 of those coins. And the computer algorithm will not let us use any more than 100. 

You can see how we can keep track of each other in that little micro economy. If Stig performs some work for me, and I give Stig five of my coins, my account is now at 20, his is now at 30. And Calin and Hari would then still be at 25. And the way that Bitcoin works, and we’re getting into a little bit of the technical, but we’ll talk about that now while we use that example. 

So, the way Bitcoin works is I would have a piece of paper. Imagine I have a digital piece of paper and each one of us would have a digital piece of paper. Stig would have one, Hari would have one, and Calin would have one. And so, whenever that transaction between Stig and I would take place where I would give him five of my coins, I would update my digital piece of paper, so that it says that I have 20 coins and Stig has 30. Stig would also update his digital piece of paper, so it says that he has 30 and I have 20. And so would Hari and Calin, even though they weren’t involved in the transaction. 

So basically, everybody updates that ledger, and that’s what it’s referred to in cryptocurrency, is the ledger, is updated. And so, although there was no money, there is nothing physically exchanged, as far as the currency goes, the fact that everybody has an updated ledger of where the accounting took place, that’s how Bitcoin or any of these cryptocurrencies work. I find that really fascinating. 

They talk about the different forms of money and the best type of money to use. And so, when you go back into hundreds of years ago, the type of money that they would always try to use was something that was very durable. Something that could hold up over time. Something else that they wanted to use was something that couldn’t be replicated or just produced on a whim like paper. 

And so, that kind of talks to the reason why cryptocurrency has really emerged. [It’s] because you can’t increase the supply of the money, so that’s what they’re trying to get around here. All these governments, they’re printing money through the nodes. They’re just printing as much money as they can, because the net drop, the value of their currency increases their exports out of the country, which produces their GDP to go up. And so, what you have is this race around the world for people to devalue their currency by printing more. 

This cryptocurrency solves that problem by stopping that by having a fine amount, a limit, a cap, if you will, on the amount of currency that’s in the system. The other thing that’s nice is that it’s completely durable, meaning that you can’t break it or you could potentially hack it, which we’ll talk about later, but it will last. It’s not like it’s going to wear out. 

The other thing that’s nice is it’s very small. It’s not something you even put in your pocket. It’d be something you’d use over your smartphone. So, those are the advantages. It’s really kind of interesting to see how this developed and what they’re trying to solve here by fixing the inflation, the currency inflation issue, but there’s another reason that Bitcoin has emerged, and that’s what Stig’s going to talk about.

Stig Brodersen  9:35  

Yeah. That’s really all about cutting out the middleman. So right now, we’re using banks. And as you are probably aware of, it’s really expensive using banks. I know this from my own experience, whenever Preston and I would do transactions, that is extremely expensive. Not only because I would have to convert that in my own currency, but also because the bank would charge me for receiving that money. 

And then, when I’m doing my accounting, my account will also charge me for using another currency. When you have different currencies or actually just sending money to each other, even though it’s the same currency, you have some sort of transaction costs. Since banks as a whole really have a monopoly or close to monopoly on that, things tend to get very expensive. 

So, whenever I heard about this cryptocurrency and whenever I started reading a book, this was really where it grabbed my attention, because I was thinking, “Well, how can I avoid paying all of those fees?”

Preston Pysh  10:31  

So one of the lead program developers for Bitcoin, I was watching a video of him talk about Bitcoin and he said, the best way I can describe this is it’s like having a bank in your pocket. Every single person is their own bank. So, if I want to send money to Stig through Bitcoin, there is no transaction fee. 

It’s just, I can just straight send him the money. There’s really no delay at all for him to receive those funds. He might want to wait a little bit for the encryption to work itself out, so that you can see that it was actually a valid transaction, and that there wasn’t double spending that occurred.

So, that’s what’s really, I think, exciting for a lot of people that would potentially be using this. If the currency could actually have a pretty solid and steady rate at which it can be exchanged into other currencies, I think that you’d really see this start taking off. But because it’s kind of all over the place, you’re seeing a lot of hesitation for people to start adopting this.

Stig Brodersen  10:33  

Alright, so that concludes our replay of the very first part of episode 30. Preston and I did more than two years ago. We really hope that you have a good understanding of the fundamentals of Bitcoin and cryptocurrencies. So now, let’s transition into a very recent discussion with Tuur Demeester.

Preston Pysh  11:48  

Alright, so we are so excited to have Tuur with us today, and this is Tuur Demeester. Tuur, as we said in the introduction of the show just comes with this extreme level of understanding of the stuff, way far better than Stig and I could ever imagine. 

And so, we are really excited to be talking to you today because I know there’s a lot of people in our audience that are interested about cryptocurrencies, and to be able to have access to somebody like yourself, we’re just really, really appreciative for you to take time out of your busy day to talk with us. So thanks so much for joining us today, Tuur.

Tuur Demeester  12:19  

Hey, Stig and Preston. Happy to be here. 

Preston Pysh  12:22  

So whenever I was talking to various people on Twitter and some of our forums as to what questions we should ask you, the one that came up more than anything else, was this concern about a potential fork with Bitcoin because of this bottleneck that’s happening. 

So, could you talk to us about what this bottleneck is, kind of put it in layman’s terms, so we can all understand what is potentially going to happen? And then, I think the thing people really want to hear is, what do you think the fallout would be if something like that would actually happen?

Tuur Demeester  12:52  

I think first of all, it’s important to understand the bigger picture, which is that if you’re going to scale network digital technology, you’re always going to have bottlenecks. It’s not like we’re facing something like the French Revolution or something. 

Five years from now, we can have a conversation, and there’ll be another scaling bottleneck in Bitcoin. That’s just gonna happen. But then, in this particular case, we have sort of two camps as far as how Bitcoin should scale. 

And just to be clear, it is already scaling. The capacity now on chain, which is, when you talk about the Bitcoin blockchain, it grows by one megabyte every 10 minutes, that’s 300,000 transactions a day. There is scaling happening off chain, because we have these Bitcoin exchanges. We have Bitcoin gambling websites, who basically perform millions of off-chain transactions a day, and then later settle them on the main blockchain. 

But the question is, now, there’s this exciting notion that maybe we can scale Bitcoin in a decentralized way where we can keep this decentralized story going and make it bigger and have like, millions of transactions a second, all in a decentralized way. That’s like the big hairy goal.

And so, the question is: How do we get there? There’s one notion that says, “All right, let’s be pragmatic. Bitcoin is a highway. It has three lanes. Now, let’s just widen the highway and make it 12 lanes. That means bigger blocks. That means faster growth of the blockchain, but also an immediate increase in transaction throughout.” That’s the one camp, and then roughly speaking, of course, there’s also people who are focused on improving efficiency, so that you can put more transactions in that very same block. 

So, that’s one camp. The other camp says, “Well, let’s look at how digital technology has scaled in the past, which is the internet protocols and so on. What you see there often is that these protocols are very inert. They don’t change a lot. People eventually accept them as is, and then they decide to build modules on top, really a modular way of scaling.”

So, as far as Bitcoin goes, you’re talking about a segregated witness, which enables Lightning, basically, [a] payment channel technology, which is you take the transactions elsewhere, and then, you settle on the blockchain. Same with side chains is also a way to scale. Take the transactions to another chain, and then finally, you come back to the main Bitcoin chain settler. 

So, these two camps basically have two different Bitcoins in mind. [So] do different futures, a bigger block Bitcoin, or the same block kind of Bitcoin and then, module is scaling. And so, it’s possible that we’ll get a fork. People will start using versions of the Bitcoin client that is not compatible with the current version, and that there will be enough of an economic force behind that so that we have two coins that trade against each other. And there’s some concerns that maybe one chain might attack the other one. 

In general, I’m not that worried. I think the market is just incredible and how it figures these things out. We already have a precedent with Ethereum, which is way more great because there it was; very hasty, hard fork, and it happened to basically fix a huge bug. 

Whereas, Bitcoin we’re in this luxury situation where as the network is spinning like never before. There’s no errors, no DDoS [distributed denial-of-service] attacks, no failure at all. It’s just like, how are we going to scale, and so if it comes to the point where some people feel very confident enough that they’re wanting to fork off, and they’re hopeful that everybody’s going to join them. 

I’m totally okay with that, because the coins that I have, which then will be legacy bitcoins. I will have coins on both chains if there is a hard fork. And so, I can just go for the ride, see what happens, and then eventually, if I feel more confident in one chain, sell the coins on the other chain and have more coins on that first chain.

Preston Pysh  16:41  

So, explain that just a little bit more for us so everyone understands. It’s almost like a splitting of stocks. Is that a way that you could describe it where you had 1,000 coins on the legacy, it goes to a hard fork, you still have that 1,000 coins on the legacy, and you also have 1,000 on whatever the new coin would be called?

Tuur Demeester  16:57  

Yeah, it could be like with eBay, [when it] was split into PayPal plus eBay. I would still have the same stake in the same economic entity. Only, it would be more granular. And I could sell my eBay stock for more PayPal or vice versa. It’s not 100% that analogy, but roughly speaking. 

With this blockchain, you can do two things if you fork. There’s two understandings of hard forks. For example, if we’re talking about [the] Linux operating system. If I have a different vision for what Linux should be, I could tweak the code and launch my own fork, and then anybody can run that. And so, it’s the same thing with Bitcoin. You can tweak the code and create a new blockchain and have a new Genesis block. 

Then, you create an altcoin. You start from scratch. Block one. There’s no history, and then people just start mining, which is, we already have 500 to 700 of those coins out there. But the hard fork that people talk about here is that you choose to retain the ledger as is, and you just tweak the client a little bit, so that it starts creating its own divergent chain.

Preston Pysh  18:00  

So Tuur, if I have a coin base account, which is what I think most people that would be listening to the show, if they do own bitcoins, they probably have a coin base account. And let’s say I have that account and this fork occurs, how am I able to see the two different coins? Walk us through this, so that we can really understand it from just the regular user, who’s sitting on 10 bitcoins at their house.

Tuur Demeester  18:22  

Yeah, so we have a little bit of precedent here because Ethereum has had a fork as well. There is now Ethereum, backed by the Ethereum Foundation and the Ethereum Classic, which is actually the legacy chain that never changed. And then, there is the other chain, that is the chain that had the DAO Bailout, but that’s a different story. But I mean, at least we can look back and see what happened there. And that was very sudden that that happened. 

And so, initially, people like Coinbase they said like, um, you know, we are focused on where Ethereum Foundation is taking this, we’re not really interested in this new version of Ethereum, so to speak. But what they saw very quickly is that it became a tradable asset.

Poloniex started listing the asset, Ethereum classic. It started getting a market value. And then people were upset that even though the chain had split and that if they had the ether in their own charge, they would have two tokens, right? And then, Coinbase only listed and acknowledged one. 

Very quickly Coinbase turned around and said, “Alright! Don’t worry, guys. We are going to also give you the ether classic. We’re not going to list it right away. We’re not going to trade it, but you can withdraw it from us.” So, I think that’s kind of what you can probably expect. 

I think it’s extremely likely if we have a contentious hard fork, which is controversial. And I do think if we get a hard fork, at least in the next 12 months, if we get a Bitcoin hard fork, I believe it will be contentious and that means there will be an economic value for both chains.

Preston Pysh  19:48  

So Tuur, I want to ask you some more questions about the fork because from the stuff that I’m reading, it seems to me like there’s going to be a high probability of a fork happening this year, but I’m curious what you think that probability is. 

Do you see this as a 50% kind of thing, or you see it much higher than that? And then, after you respond to that, I really think that the Ethereum fork would represent a really good representation of what the potential value drop would be in Bitcoin. 

I don’t know what that was before the fork in Ethereum, what the market cap was, and what it went to after the fork. But I would imagine that whatever we saw there would be something that we might see similarly play out in Bitcoin in the short term, I’m saying. And then, I know today that the classic Ethereum coin is worth about 10% of what the forked value is. I would guess that we’d see something similar happen in Bitcoin, but I’m curious to hear your thoughts on all of that.

Tuur Demeester  20:46  

Yeah. So it’s really hard, at least to me it is. It’s really hard to estimate the probability of the hard fork because there’s so much. This is like a game theorist’s playground. There’s so much you can do with just trying to manipulate public opinion. You can bluff. You can agree on something and then not do it. And there’s also the viral effect. Information flows very freely in Bitcoin. And so, whenever something new is brought to the market and the market picks up on it, adoption can happen very quickly. 

And so, for example, SegWit, which is the key to Lightning, and then, Lightning in turn is how you get millions of transactions a day in cryptocurrency. So SegWit, that’s kind of one of the contentious pieces that’s on the table at that upgrade. 

SegWit was adopted in Litecoin. And the way that went was that Litecoin is a way smaller, so of course, things happen faster. Users started advocating for what’s called a user activated soft fork. This is something that has been used one time in Bitcoin. 

The way upgrades usually happen is through the miners, but users themselves can actually choose to run a different type of software and so force the miners to also then transition. And if users change the protocol, they can basically make the mining revenues almost obsolete. They can really endanger the economic edge of the miners. 

And so, in that sense, it’s kind of like a nuclear option that you can threaten with, like, “Hey, if you guys don’t do what we want with a minor activated software, we will do it and you will lose revenue.” 

You can even threaten with a proof of work change, right? The way Bitcoin mining software is designed is specifically around the SHA256 algorithm. You can change that. Users can just decide to chain, and then entire mining farms become obsolete, and they have to design new chips to try and make it working. 

I’m just trying to describe [that] there’s so many elements to this table. Things that even [in] traditional political theory, you can’t really apply. [For example,] when you try to assess, “Is this political agreement going to happen or not?” Because usually it’s corporate, political. They come together. There’s maybe like a rival political clique that then search *inaudible*. But all of a sudden, users have huge power in cryptocurrency that is just not comparable to anything in real world politics. 

And so, I don’t know. The only thing I try to focus on is, “What kind of potential damage could there be to a fork?” That’s kind of what I’m trying to see. And then, if I’m not worried about that, I don’t really care if the hard fork happens sooner or later. I think long term, there will be some kind of fork. I’m pretty convinced. 

So with short term, what would happen if we get a contentious hard fork in Bitcoin? I think it’s fair to look at Ethereum and see what happened there. Although, the situation is quite different. With Ethereum, the developers, most of the core developers backed the new version of Ethereum, right? They backed the Ethereum Foundation’s Ethereum, which means the bailout of the DAO. 

Whereas now, with Bitcoin, most of the core developers are more likely to support the legacy chain that will then have SegWit implemented. When you look at the price, you have to take into account as well that after the DAO Bailout happened and that split, a period after that there was a series of attacks on Ethereum – DDoS attacks that had nothing to do with the split. 

And so, that lowered the price. That was my thesis that I presented to why I’m short Ethereum. [It] is because I thought there were a bunch of vulnerabilities that the market was not discounting the price for. It dropped 70%. 

But short term, there was not really a price decline. So the pie of value, the market cap of Ethereum prior to the split, and Ethereum post-split, those two together stay roughly the same. And so, I think that that is most likely to happen. That maybe depending on where we are in the general price cycle, it’s actually not going to affect the value that much.

Preston Pysh  24:51  

So I guess I’m speaking more from a person who doesn’t understand this stuff nearly at the level that you do. If I read something that says, “Bitcoin forked.” In my mind, because I know so little about this stuff, I’m scared, especially if let’s say you’ve doubled your money since you were in it. 

I’m immediately exiting that position because I just don’t understand what’s happening. I’d be curious to know how many people in the community that have a position in Bitcoin think very similarly to the way I’m describing it versus, “Hey, I really understand how these protocol networks work and it split but these are all the reasons why that’s not a big deal.”

I’d be willing to bet 10% or 20% of the people think like that versus 80% to probably think the same way that I do and are just going to cut their gains and step aside for a little bit to see what shakes out, and then, maybe re-enter at different points. 

So that’s why I think that regardless of whether the fork is good, bad, or in between, I think you’re going to see a pullback just because of the general understanding of the people that are actually involved in the market.

Tuur Demeester  25:54  

I think that’s fair. I think it’s fair. I think it’s likely we’ll see some kind of shakeout, but then, most of the question I think is like, how long would that last? A shakeout is basically when we can sell, in strong hands, have an opportunity to buy and accumulate. 

Hedge funds are not exposed to Bitcoin. There’s some estimates out there that are very credible, I think, that say, only half a percent of all the hedge funds in the world have some kind of exposure to Bitcoin. That’s miniscule. A lot of money is looking to get some exposure to the space. And so, a shakeout will be a fantastic opportunity to pick up some coins.

Family offices, a little more exposure, some angel investors, little more exposure, kind of in tech, although I do think that there’s some tech people that don’t necessarily have a hard money background that are a little bit misguided on where the actual value proposition is. 

And then, of course, there’s just lots of money. Banks have no exposure to Bitcoin. They’re focused on these private blockchains, which may turn out to be the intranet’s story of the internet, right? There was a lot of buzz around that. In the ’90s of like, private networks between corporations, that was the big story. 

I think it’s a possibility that we would get a shakeout. I still think that the prevailing trend would define where the price would go. If we already are, and technically if the prices are already somewhat breaking down, and then the hard fork happens, people will say, “Oh, the price went down because of the hard fork.” If the price is still going up strong, the market possibly won’t flinch. It can just keep going because the narrative is then that there is a split.

But SegWit is adopted now and we can have Lightning and all. So, it can be spun in two different ways, and I’m convinced that CNBC or whoever, they’re just going to go with a narrative that fits the price rather than really understanding why fundamentally Bitcoin is going up or down.

Stig Brodersen  27:52  

I would really like to relate that to discussion about trust, because it’s really, really hard to put up any kind of monetary system if there’s no trust. I think the system you have today where you have central banks basically just print money, I mean, that requires trust more than anything. 

But for people to transition into Bitcoin or another kind of cryptocurrency, are you concerned that a fork, no matter how it plays out will alienate some people and really wrote that trust with people, because it now starts to get more confusing? 

You’re already talking about, call it, 500 and 600 different cryptocurrencies. But you always have the big one, the Bitcoin, and in the second base, Ethereum. It’s already split. So, is that a concern that you have in terms of trust?

Tuur Demeester  28:37  

Yeah, I think that’s a great question actually. I think short term, yes, there will be commotion, there will be confusion about the brand of Bitcoin, especially if both sides, both camps are more or less equal in terms of economic terms. If the legacy Bitcoin has 10 times more value in terms of the Bitcoin price versus the new version, only 10%, I think it won’t be a big deal. 

But if it’s a close race, yeah, I think things will be confusing. However, I do think that this is a very different debate than what you had with Ethereum because the ether split came. Initially, the mantra, the whole value system of Ethereum was immutable transactions, trustless code, [and] code is law. All these things that were said and promised. 

All of a sudden, somebody took advantage of basically the small print and the smart contract, and was able to acquire a huge amount of coins by executing the code that was embedded in the blockchain. 

And then, Ethereum Foundation decided to bail out people who had been investing in this smart contract. So, I think it’s more likely that in that environment, you can talk about a breach of trust. Whereas with Bitcoin, I don’t think necessarily that Bitcoin is less of a digital goal because there is a difference in visions where you know how big a block should be, like, it doesn’t mean that transactions are being reversed or anything.

Stig Brodersen  30:04  

Well, I think it’s a good point that you bring up. And I think, especially for someone who is an expert and authority in the field. It makes a lot of sense to separate this. And also because you know the story about the various splits that you’ve seen. 

But if you were looking into cryptocurrencies for the first time, and you’re thinking that, “Yes, it does make sense,” you will have some kind of digital currency. And then, you’ll see all these different currencies and you’ll see how volatile they are as well. 

Do you think it would be perceived better if you just had one cryptocurrency even though it might have some minor flaws? While people could basically equate this is cryptocurrencies, yes, and that’s called Bitcoin or whatever it’s called. And that would be the exchange rate you will look up. You wouldn’t look up Ripple. You wouldn’t look up Bitcoin. It would just look up what is the exchange rate to call the US dollars for cryptocurrencies, even though it is a wide area to cover.

Tuur Demeester  30:55  

Great question. I think it’s actually healthier and better. If you have a long term vision, it’s way better than we have 600 different cryptocurrencies that are all competing with each other. Because what we’re seeing is the advent of private money. 

Also, the essence of the fact that something is private is that it happens in the market. There is zero barrier to entry. There’s competition. There’s features that are being developed and certain coins that are not existing in other coins. Then, those features, all the code is open source. They can be merged into other coins. And so, everybody is kept on their toes, and you get away faster development. 

Of course, you have a lot more, you could say, maybe scams and deceit and things that are you know, people telling you stories and people investing and things that will become total duds, and things that will go to zero that are now maybe worth $500 million or a billion dollars. 

Also, it was the same way in the advent of the internet. The same way with the railway boom. There were lots and lots of scams during all those times. I think it’s just whenever there’s a disruptive evolution, disruptive technology, you get a lot of hot air, and you get some really valuable stuff that is happening. And it’s a challenge. *inaudible* certain is too. 

And you get booms and busts very violently. And during the booms, some of the investments stick and they are the infrastructure of what later will become mass adopted. It is the same with the internet. You had protocol wars, if you look it up. The internet protocol wars, which was literally huge disagreements about what the basic protocols of the internet should become. 

Now, we all know it’s TCP/IP, but back then, they were way different visions about what that should be, so I think it’s just clear. All this to me is evidence that we’re talking about massively disruptive technology. 

Preston Pysh  32:48  

It’s interesting when you get into the protocol piece of what Bitcoin is, because for people that don’t understand it really well, that’s what we’re really talking about is a new protocol for exchange and which one’s going to emerge as the winner. 

As of today, it looks like it’s going to be Bitcoin, but there’s no guarantee that that’s how it’s going to eventually shake out 10 years from now. And I think that that’s the risk that people got to be aware of when they’re thinking through, if I’m going to invest in this, how do I navigate that sea of change most advantageously?

So, we’re curious how you would answer that, because I’ve read some of your white papers online, Tuur, and they’re absolutely incredible. We’re going to have those in the show notes for people to read. The thing that I find really interesting that you’ve talked about is the difference between Bitcoin and Ethereum, and why you were a bear on Ethereum. And I’ve seen your opinion of that kind of evolve through some of your writing. I still know that you’re much of a Bitcoin enthusiast and you kind of place your bet on Bitcoin moving forward. But you started to talk about this difference between Bitcoin and Ethereum. I would really like to hear more about that.

Tuur Demeester  33:56  

Yeah. So briefly, I want to comment first about how you find your way through this maze? One of the things that helped me or that I use to get clarity or to stay sane, because that’s hard enough, is just to focus on what technologies do we have that actually have consumer use cases. What real-world adoption beyond speculation? Are we sane?

So, that’s something that I tried to keep in mind because you have a lot of white papers and lofty business plans. I saw lots of those during the .com bubble, and it doesn’t mean that it’s really anything of substance. Whereas Amazon, for example, they could show their sales numbers went up and up and up, all that kind of thing. 

When you’re talking about Bitcoin and Ethereum, in particular, Bitcoin was conceived as a digital cash and digital gold, which actually is very similar. To talk about cash, it’s like a better bond. It’s like something that you have readily accessible and that may actually imply scarcity and may play some of the characteristics that we know of in gold. 

And so, what happens when you design a cryptocurrency with that as an end goal in mind is that you start focusing on security very, very much. And that’s how you end up with these blocks that are just one megabyte, right? I mean, what is one megabyte in these times? 

The entire Bitcoin blockchain, I think is not like 13 gigabytes. That’s not a lot of money, but keeping it small like that allows the network to be truly decentralized. It allows the future to be insured. It allows transactions to be censorship-resistant in a provable way. So, that’s Bitcoin. 

Ethereum, what they wanted to do was to create a decentralized internet. What if we do away with these opcodes and say, you can publish anything you want on that blockchain. Any code will execute it. This is the cloud-based computer. And so, then, they call that code smart contracts. 

So, we can have a rental contract or anything you can imagine, you can execute on that blockchain. And so to get there again, there are approaches to building way more flexibility. That’s something I’ve talked about in the past. 

The trade-off is that you have a lot more security concerns because what if somebody uploads a so-called smart contract that’s actually designed to crash your nodes, and all of a sudden, none of your nodes are working. They’re all the second DDoS attack, and you have to then rush in to fix that little bug. And then, continue on. 

And so, security experts, it’s kind of a nightmare for them. Because if Ethereum has an attack surface that cannot be clearly defined. Whereas with Bitcoin, you can say, “All right, here are the exact risks of how the history of Bitcoin could be reversed, or of how nodes would crash.” It’s very, very well defined. Ethereum has none of that. And so, it’s kind of like, it works as long as it works. And so, that’s one of my concerns. 

Obviously, maybe I’m biased because my background is that I want a savings instrument that has high liquidity and extremely high security and almost no counterparty risk. That’s my focus. And so Ethereum is never something that I wanted or I aspire to. But even objectively, I still think you can ask the question: “What real world use cases are there today of Ethereum smart contracts that cannot be done in a better way by just using a MySQL data?”

Preston Pysh  37:23  

So, for me to just kind of summarize, so that you can say, yes, you understood that or you didn’t. But basically why I’m restating this. When it comes to Bitcoin, you see that as a good store of value and something that could be used as global money, global currency. 

When it comes to Ethereum, it’s a great platform for exercising smart contracts. So like, let’s say, I sold you my car, and we want to set up a loan payment over five years. If for whatever reason, let’s say my car’s smart enough that I could code it that if you failed to make a payment, it would automatically stop the digital key that you can’t drive it anymore, and I can repossess the car because you didn’t make that payment. 

We could do something like that on Ethereum. But with Bitcoin, that’d be very difficult to do something like that or to program something that would operate on the Bitcoin protocol doing something like that. Is that a correct way to look at it?

Tuur Demeester  38:16  

I agree with most of what you said. I would disagree with great, he said, it’s a great way, a great platform to do smart contracts. And the reason why I take issue with that is that it’s still unproven. It’s also not the case that you cannot do that with Bitcoin. 

The fact is that with Bitcoin, you would have to wait a bit longer until we have these second or third layer protocols built on top of it, and then, execute it on those layers, and then just use the main layer to maybe settle the transaction or something like that. So it’s not that Ethereum is doing something that’s impossible in Bitcoin. 

The worry that I have with Ethereum is that, if we accept that Ethereum is a less or an inferior store of value platform, how can it then really be the base layer for all these smart contracts that in the future would hold billions of dollars of value? 

Why would I trust my real estate transaction with that Ethereum blockchain if maybe in a year from now, it’s going to hard fork. And we’re going to reverse some transactions or my existing smart contracts stops working with this because I changed something. That’s something I’m really worried about is that if you stuff too much in one protocol layer, things can get really messy and confusing.

Stig Brodersen  39:29  

I would really like to talk about what you said before about the digital gold. Preston and I have covered gold multiple times here on the podcast and we always talked about how the scarcity of gold is very valuable in the monetary system, which is also why we had that until 1971. 

Now, I listen to this podcast with you when I was doing research for the interview. And what you did in that interview was that you compare the market cap of Bitcoin with the market cap of gold. And one of the things you said was what if Bitcoin is just 1% of gold. 

It was very little back then in October 2016. And you said, “Well, if it was just 1%, Bitcoin would be priced at around $3,000.” That’s what you said. So, could you take us through that process in terms of why you think that Bitcoin is perhaps the digital gold and the good properties of that.

Tuur Demeester  40:23  

Bitcoin was conceived as digital gold. This is something that goes back even 20 years before the code was launched in 2009. People were talking about digital gold and how to do that. And then, there’s initiatives like E-gold and all those kinds of things, so this isn’t a long history there. 

Satoshi himself, who is the inventor of Bitcoin mentions Bitcoin as digital gold, compares it to gold six times, even though he was only active for one period of one year. 

So how is Bitcoin digital gold? Well, first of all, it solves the problem of what’s called, double spending. The idea is that if I create a digital currency, nothing will stop me from spending the same token or the same coin twice, thereby increasing the money supply and actually robbing value off everybody else, which is what happens if the traditional financial system when banks or central banks just create money out of thin air. 

And so, the way they solve that was to introduce this idea of a shared ledger. We just have a fixed amount of tokens, and then, we shift them around among the owners, but we keep [a] very precise track of where the money is, so that no coin is ever duplicated. 

So, Bitcoin solves that in a masterful way. And proof of work is a very important part of that, which is that miners have to do work to acquire a certain voting power to decide what the final version of the ledger is. There are new transactions added all the time to the ledger, so that every time you have to decide, like, are we going to go left or right with where the ledger is going? 

So finite supply, the software will only ever be 21 million bitcoins that is embedded in the Bitcoin protocol. There is no way to change that except to fork, which is fine. You can do that. 

And a Litecoin, for example, has four times the amount of coins as Bitcoin, and it was based off the same code, but those nodes, if you run the software, don’t talk to each other. They speak a different language, so they will never interfere. So finite supply, the fact that the transportation is virtually without cost. If I can send you an email, I can send you bitcoins. 

I would argue that storage of bitcoins actually can be done more securely than storage of gold because with Bitcoin, there’s something that’s called a multisig, multi signature transaction. I can have a wallet of bitcoins that can only be spent if, for example, three out of five signatures are provided. And then, those keys, those signatures, I can store on five different continents. 

And so, if some entity wants to rob me, they would have to break into vaults on three different continents to be able to spend those Bitcoins. That’s different with gold, you cannot store gold the same as the gold in different locations. So there are several properties like that that make Bitcoin, I think, extremely powerful as a digital cash; a savings instrument digital gold.

Stig Brodersen  43:14  

I think it’s a really interesting point again that you bring up because whenever we are talking about the price of Bitcoin or any other cryptocurrency. I mean, what is it that we really need to compare it to? And if you look up like the current price of Bitcoin, say, it’s around $2,000 and you’ll be like, “Why is it worth $2,000 today? Why was it only worth, call it, $200 a few years ago?” 

It goes into this very weird discussion of how to actually find an appropriate price. So whenever I started it, there are some people saying, “Well, you should kind of look at the value of Bitcoin as what are the processing fees you would use for Visa and MasterCard, for instance, if that is really the problem it’s solving.” 

And you know what? Then, you will have other people saying, “Well, perhaps you should compare it to the price of gold because that’s another problem that’s solving. It’s a finite supply, storing of value.” So, let me ask this broad question: How did you come up with the fundamental value of Bitcoin?

Tuur Demeester  44:15  

So, to me, the main problem that Bitcoin solves is how do I store well? That’s the main problem it solves. And so, comparing the Bitcoin market cap, currently $40 billion to the gold above ground physical gold, which is about $5 trillion, makes sense to me. 

Right now, we’re at about 1%. I think we can totally go to 10%. But it doesn’t stop there in my opinion, because there are stores of wealth that are vastly bigger than gold. We have government bonds. We have forex markets which are huge. I think roughly speaking, we can talk about a pool of $100 trillion worth of value that is considered to be liquid, and relatively stable that Bitcoin basically competes with. 

So, when you talk about future valuations, I think it’s not outrageous to talk about a Bitcoin price of $100,000 or a million dollars. When you look at the qualities of Bitcoin and especially when you take into account that the amount of scaling that’s going to happen, I think it’s hard to argue that it’s not actually better than gold in several respects or better than a 10-year government bond or better than if you take [the] US dollar, for example. 

Stig Brodersen  45:33  

I would like to just take one step back and not so much talk about only the fork, whether or not that will happen, call it, in a year or two, whenever it will happen, or perhaps not happen. But really, in the grander scheme of things, I would like to do that by talking about creative destruction. 

Creative destruction is actually something that we talked a lot about here on the podcast, even though we typically don’t use that fancy term. But it basically means that everything will always improve and become more efficient. The example that we typically use, and what Warren Buffett, Charlie Munger use is that we used to run on horses. Now, we have cars, and soon we will have driverless cars. So, it’s not really not a question about if it will happen, because it will happen. We just don’t know when and in which form. 

We can see the same thing with different monetary systems. I mean, we have seen this with the bartering system. Mesopotamia, Ancient Rome, whatever that system has been, we always come up with something that’s been more efficient. 

Also, I think there are a lot of good arguments for saying that cryptocurrencies, one way or the other, in the digital age is a more efficient monetary system. Having said all that, I also think there’s a lot of reasons why you could argue the opposite, why it won’t go that way. 

So, I’m curious to hear your thoughts on that. Will we see cryptocurrency as something eventually replacing the fee of [the] monetary system? Whether it happens in 10 years or 100 years from now, or will it always be like a way of storing value digitally?

Tuur Demeester  47:07  

Yeah, great question. If you look at finance, obviously, there’s some changes that have happened over the years. Different financial products that have been designed. And we have come off the gold standard for 6,000 years. The way to save was to have gold, and then, that transition gradually went from like a gold backed standard to then fully digitized fiat tokens, what we have now. 

I think that Bitcoin is really a monumental proposition for creative destruction. It really fundamentally challenges. You can go back to 2012 and look at the ECB [European Central Bank] paper that was put out, talking about virtual currencies as what they called it. But I think Bitcoin was mentioned 150 times in the paper. 

Basically, the ECB was talking about how their seigniorage revenues were being threatened by these private digital currencies. Seigniorage is from a central bank point of view. What we call inflation is actually part of their revenue stream. That’s how they make money for themselves, so that their revenue stream was actually threatened by these competitive technologies. 

I think that what is most likely to happen is that we get some kind of a crisis in the financial system. For a bitcoin will grow on its own, but then when there is a big crisis where we have a currency that used to be considered a store of value that all of a sudden goes into stagflation, high inflation, hyperinflation. 

I think that could be a sea change moment where people realize that there’s actually this backup financial system that’s already operational, and they can just make the switch, and that’s when you will see governments accepting taxes expressed in Bitcoin, for example. 

That’s when you’ll see Bitcoin being used as a reserve in this kinds of things. So, I do think that we can see a significant, almost unimaginable adoption of Bitcoin or maybe I’m wrong, and maybe it’s another cryptocurrency happening in the future.

Stig Brodersen  49:14  

Yeah. And back to what you said about that might be a safe haven if we see a crisis. I mean, traditionally, a lot of people were saying, “Oh, we need to go into gold because that is a soaring value if something happens.” 

Just as common to that, I would also like to stress that whenever we’re talking about the value of Bitcoin or the value of gold, for that matter. It’s always priced in another currency, so that doesn’t necessarily mean that the value of Bitcoin or gold has gone up. It could also mean that they save. The value of the dollar has gone down.

Tuur Demeester  49:47  

Which is why I was hesitant to say, but Bitcoin is going to go to a million dollars because what is that million dollar going to buy? Is it going to be a car? A house? Is it going to be a bicycle? Like it all depends on the inflation.

Stig Brodersen  49:58  

That’s a great point. What I’ve been a bit confused about whenever I’ve been reading up on the price development of different commodities, whenever I looked up on price development for instance on gold is that I don’t see a closer correlation between Bitcoin and gold. I don’t know if it’s because there is a lot of speculation on Bitcoin. 

Obviously, there’s a lot of speculation with gold as well. Or it’s simply a question of having a somewhat similar supply side. The demand side is very, very different from Bitcoin, but all these people flowing in right now…I’m curious to hear about your thoughts on that, and really explain the volatility.

Tuur Demeester  50:38  

So, it is true that the correlation with Bitcoin and gold is very weak. Actually the correlation with Bitcoin, and virtually anything, any financial asset is at least extremely weak. The best case you could make is a negative correlation between the Bitcoin dollar and Chinese yuan dollar, which is basically indicating that, if there is a downtick in the yuan, if there are some fears of devaluation, then people go to Bitcoin. And there is a very active trading community in China, so that is interesting in itself. 

And why is it not higher? Because it would be logical to say. I think the main reason is that Bitcoin is just tiny, super tiny, and that the forces of adoption play a much bigger role. So you have these, if you look back on the Bitcoin price here, these waves, these cycles, Bitcoin went from $1 to $30, and then down at $2, and then up to, I think, it was $160, and then, down at $85, and then up to $1,200, and then down to $150. 

I know I’m talking between these price points. We saw sometimes six months or a year’s path, so really big price waves. I think that is really adoption, that’s technological adoption. That is basically all the time this dynamic between weak hands and strong hands. 

Strong hands buying at the bottom, and then weak hands jumping on board as the price accelerates. And then as the price declines, the weak hands panic, and they sell and new strong hands come in. I think that is an important part of understanding the Bitcoin price. 

A lot of people that got involved in Bitcoin had a technology background. They weren’t necessarily looking to make a lot of money or they didn’t have an understanding of investing necessarily of value investing or anything like that, and sometimes people just misunderstand Bitcoin as well. 

Sometimes they buy it because they think it’s going to be the next FISA [Foreign Intelligence Surveillance Act] competitor. And then, they see the fees on the Bitcoin network, all of a sudden, go to $1, $2, or maybe $3, and they panic. It’s like, “Oh, my god! My whole narrative is destroyed. I should sell.” 

So, it’s not necessarily that these people will lack the will, but sometimes there’s some different interpretation of what Bitcoin is. I think that plays a big role. There’s also the fact that Bitcoin miners all the time are exposed to the Bitcoin price. So, every 10 minutes, a block is mined. 

Some miners somewhere win that block. So they get all the transaction fees in the block plus block reward fee. Currently, twelve and a half bitcoin, not too bad, right? That’s $24,000. And so, if the Bitcoin is rising, they can either sell it right away, or they can afford it. They can decide to keep it and sell it at a higher price. That’s very tempting, especially if you have like a one-year bull market. 

A lot of miners, they start thinking that maybe I’m not just a blue collar miner, and I’m a technology guy. I’m not necessarily a speculator. They sometimes change their mind and decide to hoard coins. 

And then, supply gets constricted. Instead of 380,000 bitcoins a year, maybe you get only 100,000, that new bitcoins on the market, and all the rest is hoarded, which is great until the price starts declining again. 

Then, the miners might not only offload the bitcoins that they have already hoarded, but because the price declines, maybe their profit margins are getting under stress. Maybe they overstretched. Maybe they have some debt that they incur. Maybe there’s new competitors on the market that have made mining more expensive. And so, maybe they will start selling a higher percentage of the new coins as well. 

I think it’s really important to understand because this made me underestimate the length of the Bitcoin winter in 2014 or 2015, I think, is that not only were miners hoarding on the way up, but they took a long time to start offloading, offloading, offloading these coins. So there’s more dynamics, but these are some of the things that I think sometimes people miss.

Preston Pysh  54:36  

So one of the things that I find really fascinating about blockchain technology is all the other things that you can do. We talked about a little bit when we got into the Ethereum discussion. But let me just throw out a scenario here for people that might not understand this aspect of blockchain. 

So, say, Stig and I wanted to start a new company, and we wanted to do an offering of equity of the business. Let’s say we want to sell off 10% of our business to raise money early on. We can now do this through blockchain technology without having to go through some big bank that’s going to suck a ton of fees out of it. You’re basically able to do your own IPO through blockchain technology. 

So, I’ve read this in books that you can do this, but I’ve never really talked to anybody that’s done it in application. So my question for you is, can you do this today? And if you can, where would you go about doing it?

Tuur Demeester  55:29  

Yeah, you can do it today. I think it’s like ethereum.org/crowdset. I think there is actually a page and they will just walk you through how to do it, and there’ll be a smart contract, and it’ll be published on the Ethereum blockchain. And you can start raising funds. I don’t know the exact number but hundreds of millions of dollars have been raised this way. I think that long term, there is something there. I think there’s really something there that’s going to stick around where this is obvious evolution from Wall Street based capital raising, to then venture capital, to then crowd sale. 

So, Kickstarter and things like that to then, actually offering equity to the market. I don’t as far as I know, because of course, I mean, equity offerings have happened in the past like straight to the public. It has happened during the railway boom. It happened in the ’20s. So, it happened many times in the past, and usually during a bubble, a lot of people get scammed. And this is in part why securities laws have been brought into creation.

Preston Pysh  56:38  

So it’s really interesting. A couple of different points that I’m thinking about, as you said all this. First of all, the fact that it would have to be done on Ethereum and not the Bitcoin blockchain. I find that to be really interesting. And I think about it more from the dynamic that if IPOs are just one thing you can do on Ethereum that you’re not today able to do on Bitcoin, that gives a lot of momentum to that as a currency. 

Because if now you got that application and another person builds the next Airbnb that you don’t have to pay Airbnb a fee to, it’s just customer to customer transaction because you don’t need that overhead there, that creates a lot of momentum in that currency. 

The other part that I have a question for you on is, let’s say, Stig and I do this IPO on Ethereum, and the coins that people are able to basically secure, let’s say that they own some of this equity, are Ethereum its ether. Is that what it is, or is it some other spin off coin that would be called, you know, Stig and Preston’s coin that makes it separate from ether, I don’t understand that part of it. Can you explain that to us?

Tuur Demeester  57:42  

Yeah, I think most ICOs [Initial Coin Offerings] create, in your case, it might be like [the] S&P coin or something like that. And the cool thing about it is that, all of a sudden, you might have a phone call with a few of these exchanges. 

And then, one of them might bite. Maybe you offer them some money even there’s exchanges that will take some money, and then they will publish your pair, your token. All of a sudden it gets traded. And because you are the company, you obviously have allocated a lot of tokens to yourself. 

And so, then, as it gets traded, it gets a value. And you can basically offload some of those tokens to liquidate them and make some money. Obviously, if you have malicious intent, you could do a pump and dump. You can invest $200,000 in marketing, and make sure that there’s an enticing story. The price pumps, and you can then offload, and you can make $500,000 based on the buzz. 

But yeah, I think attractiveness is if you have a token that is specific and it trades then all of a sudden, the market is going to value your company at a certain amount.

Preston Pysh  58:49  

All right, so Tuur, we can’t thank you enough for taking time out of your day to chat with us. I could literally talk to you for probably the rest of the entire day. It’s the morning over here, so I’ve got a lot of questions for you. This stuff is fascinating. 

My opinion is if people don’t get smart on this stuff and start to really understand it, they’re going to be left in the dust with a massive opportunity, whether it’s Bitcoin or Ethereum, or whatever. There’s just so much to learn. And you are definitely one of those sources out there that I really trust. I know anything you write is now on my reading list because, man, I’ve learned so much from reading your blog and talking to you today. 

So, we can’t thank you enough for that. If you could give a hand off to people listening to this, where they can learn more about you, your Twitter handle, stuff like that, I’m sure they would love to know what that is.

Tuur Demeester  59:37  

Yeah, I would recommend just Google my name. The first result is my Twitter handle. I’m on Twitter every day. So that’s where I do most of my stuff. And then, I have my articles, which I usually post on Medium, medium.com. 

So, if you go there, it’s pretty easy to find my articles. I have some reports that I’ve written over time, but I publish those links occasionally because I don’t like to promote reports that are maybe a bit outdated. 

I talk about those as they come out. And then, what I’m doing in general is that I’m moving to the hedge fund space. My passion is to, I think, the time is right for institutional investors to come into Bitcoin. There’s a lot more interest now. And so, that’s where I’m looking to specialize.

Stig Brodersen  1:00:19  

Alright, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We see each other again next week.

Outro  1:00:26  

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