In 2017, we saw Bitcoin grow by over 1300%. Ever since the start of the new year, however, things have been pretty ugly, with a year to date performance of -50%. So what in the world is happening? Is bitcoin still the darling new asset class that so many people believe in, or is something more frightening on the horizon? Well, on today’s show, we are going to have a little discussion that covers both sides of the argument. In one corner we have Tuur Demeester. Tuur has been an investor in Bitcoin since the early days when one coin was only $5. Since his initial position, Bitcoin has grown by 132,000%. Tuur has a huge following with over 159,000 twitter followers because of his in-depth ideas and comments about cryptocurrencies. On the other side of the argument, we have the talented Erik Townsend. Erik is the host of a very popular investing podcast called Macro Voices. Erik got his start as a computer programmer and by the age of 17, he was already an independent software development and design consultant. Erik is an entrepreneur that has built successful tech companies and he’s also the founder of his own global macro hedge fund.

In this episode, you’ll learn:

  • Why the Bitcoin community is so focused on the distributed ledger
  • Why the bitcoin blockchain consumes so much energy and why it’s important for the security of the blockchain
  • How Cryptocurrencies in the future likely have different layers of centralization
  • If governments eventually will take over with their own cryptocurrencies

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIP.

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Preston: [00:00:04] In the past year we saw bitcoin grow by over 1300%.  But ever since the start of the new year, things have been pretty ugly with a year to date performance of negative 50 percent. So what in the world is happening? Is Bitcoin still the darling new asset class that so many people believe in or is something more frightening on the horizon. Well on today’s show we’re going to have a little discussion that covers both sides of the argument in one corner we have Tuur Demeester.  He has been an investor in bitcoin since the early days when one coin was only five dollars since his initial position. Bitcoin has grown by 132 thousand percent. Tuur has a huge following with over 159,000 people online because of his in-depth ideas and comments about crypto currencies. Then on the other side of the argument the bear side of the argument. We have the talented Eric Townsend. Eric is the host of the very popular investing podcast called macro voices. Eric got his start as a computer programmer and by the age of 17 he was already an independent software development and design consultant. Eric is an entrepreneur that has built successful tech companies and he’s also the founder of his own global macro hedge fund. This is part one of a two part episode. So whether you’re a bull or a bear on the future of bitcoin crypto currencies we hope you enjoy this thoughtful discussion from two very intelligent individuals. You’re

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: [00:01:27] Listening to the investors podcast when we study the financial markets and read the books that influenced self-made billionaires than most. We keep you informed and prepared for the unexpected.

: [00:01:47] All right so I am really pump to have Eric Cantor on the show and before we start Guys I want to embarrass you a little bit. So Eric I’m a huge fan of your show and I haven’t had an opportunity to tell you this but I listened to your show all the time and you guys have such a quality product so this is really exciting for me to have you on the investors podcast be talking to you and I really appreciate you taking time out of your day to be here. And also ter I stalk you on Twitter. I’m just going to say it like it is like I follow your Twitter very closely. Probably closer than almost anybody else that I follow so it’s an honor to have you back on the show. I’m a huge fan. You’re obviously brilliant in the crypto space so very excited to have you here. Let’s go ahead and dive right into this crypto currencies. They’re built on top of an enabling technology that’s called distributed ledger. So let’s start there Eric in your opinion how do you understand distributed ledger. Why do you think it’s so important.

: [00:02:44] I think it is super important Preston. And the reason is this is no exaggeration. Since the beginning of time a limitation that we’ve had and all information systems. When I say beginning of time I mean before computers going back thousands of years. Any information that you had let’s use the ledger for a bank account as the example had to be controlled by somebody that somebody in charge of that. And that meant that whoever that somebody was could be a bad guy they could commit a fraud and they could steal money into all sorts of bad things. Now in the beginning it was actually a ledger was written on a piece of paper and it was kept in a locked room someplace in a bank. When we got mainframe computer systems in the 1960s now it was on a transaction processing system on a mainframe. Eventually it found its way onto distributed database technologies more 80s 90s kind of technology that would solve a few problems in the sense that it would solve redundancy issues if one computer failed it would save a copy of it on another computer. It would also there was a lot of enhancements to security in the 80s and 90s that protect us against outside bad guys hackers and so forth. But if you’ve got an inside job if the management of the bank is corrupt they can control that data. And the idea that there’s data somewhere in a network that no one person has authority over that nobody can hack that never existed really until bitcoins. BLOCK chain invented this idea of a distributed ledger and the idea is basically that information is stored in a distributed network in a way where there is no one party that can control it. It is based on a system that uses consensus of a number of different actors in the network and if it is properly implemented it can truly be hack proof.

: [00:04:32] Even the management of the bank can’t hack its own system and that really is a huge improvement so I think it is going to change the world in a big way. But the big huge caveat that I put on this and I liken block chain which is the distributed ledger underpinnings of the Bitcoin crypto currency. I think of it like the Wright Flyer the first airplane that ever flew. Huge history making thing super duper important. It’ll never be forgotten. But you go to the airport today you don’t see a lot of right fliers parked out on the tarmac. We’ve come a long way since then the technology’s gotten better and there’s no smart reason to go fly one of those things anymore. My contention is that because of some specific design limitations particularly something called proof of work which we could come back to later. BLOCK chain is designed in a very limited way that makes it not super duper scalable not at all scalable. And I would argue so I liken it to the Wright Flyer simply because it’s super important in history. I think that the invention of the airplane was obviously important the invention of the distributed ledger was important. The first airplane had some serious limitations. So does bitcoins block chain. And I think that’s where Toora and I probably disagree certainly block chain is the only thing going that has achieved what block chain has achieved. I think that other things are going to soon supplanted and that’s going to cause real problems for the bitcoin crypto currency. This idea of mining particularly you don’t need that. There’s better ways to do it.

: [00:06:04] So let’s hear his thoughts here. Specifically on distributed ledger I’m kind of curious if you see it a little bit different than Eric. And then we’ll dive into all these other things about the scaling and stuff a little bit later.

: [00:06:16] Yes so let me take a stab at this. So I think it’s important to understand some of the history to me with services Bitcoin. And then later I noticed that people started isolating this idea of a ledger that’s distributed and you know that the aim of the locked chain focus of almost an entire industry right now. So the initial project that was behind bitcoin was this challenge like how do we find a way to create a private currency. And one of the first things you run into one of the problems is how do you prevent double spending something that’s digital obviously can be replicated. So if I have a balance of certain amount of tokens then I should be able to create IPs. So how do you make something tamper evident or tamper resistant or even tamper proof. That to me is where it gets interesting and bitcoin has its own solution for that. We will talk later about as work. And so in my view a lot of the current approaches to these distributed ledgers. I worry that they may not be thinking enough about whether their phones really needs to centralization and if it does I worry as well that they’re maybe not thinking enough about the real cost of the centralization and that’s what you need to get that immutability temper resistance in your system that censorship business. And when I talk about cost like I always call a block chain the world’s worst database. It means that you store everything forever. That’s what it is. You have a ledger that goes back to the Genesis moment the very first transaction all the way till today. So you really have to think hard like do I need that or can I just use a minuscule database server client model. So that being said I think it’s possible that there are some benefits to Federated proprietary block chains. But at this point they’re a little bit unclear to me. Maybe it does offer higher on its ability accessibility transparency. But I worry about what are those features really if the distributed ledger we’re talking about is not fundamentally immutable or sensitive business.

: [00:08:27] Yeah that’s a very interesting argument you bring up there. Or do we really need to go through this energy expenditure and all the costs really wrapped around this tedious process of having a block chain. Let’s talk more about this proof Adwar concept. So the distributor letter is Bill Auberon proof of work. So Eric could you explain the concept to us.

: [00:08:49] Well let’s go back first to how is it possible to decentralize a ledger the old system. Was that a central party. Let’s say the bank in the case of a bank Ledger was the owner of that data. And that meant they could do anything but other people were not allowed to tamper with it. If we want to make it so that even the owner or the originator of the data such as the bank is unable to tamper with it. The obvious answer is some kind of consensus based model where different actors in the network have to agree to allow a transaction to go through. Well if it’s based on consensus and that means that a majority of the different participants in the network could vote to overrule everybody else. If you think like Goldman Sachs you just say hey let’s buy more computers than anybody else and we’ll just be bigger in terms of how many network participants we are we’re going to create you know 200000 bitcoin mining players that appear to exist on the network when it really it’s just one guy who’s behind it that’s known in the computer security world is a Sybel attack where you pretend to be thousands of different people in order to gain voting advantage in a consensus system. There has to be some way to thwart Sybel attacks to prevent them from taking over the network.

: [00:10:04] Proof of work was originally invented as a deterrent for spam e-mail and the idea was to say let me do some really complex math problem which is going to consume a huge amount of computing resources on my side. I’m basically proving to you as the recipient of the email I not only sent you this e-mail which a spammer might have been sending to a million people but I went through a whole very expensive process to calculate the answer to this math problem to prove to you that I really really wanted to send you this email. I can’t afford to do that math problem. Over a million times to send it to a million people. So you can trust that this email really is a one to one that’s for me to you and not just junk mail that’s being sent by a spammer. That’s what proof of work was invented for. It’s basically going through a very time consuming and compute intensive operation in order essentially. When you think about it to basically prove that you’re willing to waste a whole bunch of electricity and computing resources and it’s really just to make it impossible for anybody to be able to afford enough computers to launch a single attack against the rest of the network now in block chain the way that transactions are validated is they have these kind of volunteer guys in the network that sign up to say I’m willing to look at the transactions that are being processed through this system make sure by checking the ledger that they are not double spending the same bitcoin over again and in exchange for doing that.

: [00:11:41] I’m going to get paid in bitcoin for helping to secure the network that process is called mining what the miners have to do is compete with one another in order to put the next block into the block chain. And the way they compete is essentially to say through this proof of work algorithm who is able to waste the most electricity and the most computing resources in the shortest amount of time to solve this complicated math problem to prove that they’re not just one of thousands and thousands of guys that one person has put on the network but that they’re actually putting all of their computing resources behind this. It’s really important for people to understand the high complexity the high compute power that’s required for minors is not because there is some super duper secure encryption algorithm that makes bitcoin safer. The process of encrypting the block chain and making sure that all the transactions are legitimate and that no bitcoins have been double spent it really doesn’t consume very much energy at all.

: [00:12:47] What consumes a huge amount of energy is this arbitrary math problem that says I am proving to the network that I’ve basically dedicated all the computers I can find to solving this arbitrary problem trying to beat everyone else now that works fine and a proof of concept. If you’re in a laboratory you got five guys demonstrating this idea it’s no problem when you try to scale that to a global payment system you end up literally consuming more energy than entire countries use with everybody competing to put the next block on the block chain and block chains are actually designed that the complexity of this arbitrary math problem gets harder if more blocks are being put on the block chain too quickly. They make the problem harder until it slows the network down. So this whole idea of proof of work is slowing the network down with arbitrary work that doesn’t need to be done for any reason other than to deter against Sybel attacks. Well the obvious question is surely there must be a better way to guard against simple attacks to prevent bad guys from breaking out the network and pretending to be a majority of the network participants when they’re really just one bad guy.

: [00:13:59] All right. Term really curious to hear your thoughts on a response to that.

: [00:14:03] Yeah that was so eloquent and well put. Eric I always try to do this. The human strategy where you find the best argument of the other side and I feel like you’ve nailed it like there was a great presentation of let’s say for skeptical arguments. There there’s a lot. I agree with how you technically explained the concept but I’m not going to go over that it’s that you know you prevent similar attacks by requiring work to be done. There’s two words in particular that jumped out for me and that is waste and arbitrary.

: [00:14:35] So calling the proof of work mechanism wasteful depends on your perspective right. If you look at where a proof of work is used and I want to stress that a proof of work is not something that was conjured up or invented by brilliant as that concept in the digital world is it’s basically something that exists in nature and that’s just reapplied in the digital world and nature is often known as Andy Card principle where animals will develop features that seem wasteful from the outside observer but then when you really look at it it really serves a function.

: [00:15:12] For example the ECoG as you know this very elaborate weather pattern makes a lot of energy to produce what it does is that not only is it able to prove that it’s a strong individual animal but it’s also a feature that is extremely hard to imitate from a predator’s point of view. And you see that over and over with these features are actually security features that are present in these animal species because of work. You can also see it for example and the behavior of bees where the queen bee is going to fly extremely high until only one male is able to follow her. And that will be the one that made with her that’s you know it’s ending. You can call it wasting energy but really it’s spending energy to then converted into something else. And usually that security by the way gold you could call gold as well as distributed ledger. So in that sense I disagree with you that you know this is the first time in the history of the world that we’ve seen this I would call gold a distributed ledger that’s on Earth that by the expenditure of work and the way gold is distributed in some ways is going to reflect our value as distributed. It’s a ledger to keep track of transactions and value in the world.

: [00:16:25] Just to add to the idea that you know proof of work is wasteful and when money is wasteful if people talk about you know mining consumes as much as an entire country I’ve heard a recent estimate that said as much as the state of Massachusetts. Keep in mind that miners can be installed pretty much anywhere on the planet. So what you see is that they go to for example the country of Georgia they go to Iceland they go to places like Washington state where you have extremely cheap energy that nobody wants and then they convert that into financial reliability. That is what they do. Another way to look at proof of work is think about if you want to preserve a secret right because that’s basically what you do if you want to protect information that’s in the ledger. You want to preserve a secret is kind of like hiding a treasure. So one of the most successful ways that you have hidden treasures in the past is the very very deep or to build a pyramid on top. And if you want to get hold of that treasure the energy that you need to expend at the bottom of the pyramid like in the middle of it is going to be proportional to the energy that was spent to constructing it in the first place.

: [00:17:30] So that’s another way to look at it and then if you think about the alternative approaches that have been suggested with a stake in particular and other ones they almost always boil down to some political construct where you know we try to reach consensus by some form of voting and then you are going to penalize the people that are in charge. So I imagine if the Egyptians had come up with a political system to protect their mummies I think the chance would be very low that we would still be able to see them in museums. They might answer to a lot of the state proposals. My suspicion is that it’s kind of the equivalent of alchemy. We’re in the middle ages. People tried to create gold. They didn’t want to have to get out of the ground because that cost so much energy they wanted to find a shortcut and create gold out of other elements and never succeeded of course. So I think that they try and bypass and try and spend a lot less energy to get the same amount of security. I think that’s going to be proven a fallacy. But of course you know I’d love to be proven wrong and I’m open to see what the future is going to bring.

: [00:18:38] All right so a block chain’s been around for almost a decade now and there’s some people that are like on Eric side saying the proof of work has been criticized in tourer saying that you need proof of work for security. I’m kind of curious how you guys see this going forward if there’s going to be a new technology that emerges whether there’s something in the works that could potentially replace proof of work. I’m just kind of curious to hear your thoughts so Eric ahead take it away.

: [00:19:02] Yeah I definitely think that this is the major breakthrough that we’re waiting for and we need to see and it is the distributed ledger system that is decentralized and it is just as secure if not more secure than the proof of work based a block chain distributed ledger is but it doesn’t have minors it doesn’t rely on proof of work. It is orders of magnitude faster and more efficient because it relies on some other mechanism besides proof of work to assure that you don’t have Sybel attacks and other vulnerabilities that security experts tend to look at. I absolutely believe that that’s possible and I can’t help but observe that the smartest bitcoin guys are the trend right now is they’re going off and working on other distributed ledgers commercial products which are not part of Bitcoin. They’re trying to get rid of mining. They’re trying to get rid of proof of work and find better ways to skin this cat. And I absolutely think that they are going to succeed and it’s a matter of time. And you know I think a lot of what Turse said I know is it wasteful or not. Well if your car breaks down and you’re supposed to go on a date with a girl who lives eight miles away and you walk to her house instead you’re going to impress the girl. But I still would argue that you wasted a lot of energy doing that. I think that’s really what proof of work is it is going to a huge amount of energy consumption to prove something that could be proven more effectively in other ways.

: [00:20:35] So I think that it is going to be achieved now there’s a really important aspect of this to understand which is how hard is it to do a decentralized ledger without proof of work. The answer to that question is if you truly mean completely decentralized in the bitcoin definition of decentralized where there is no central control whatsoever and it’s totally peer to peer. Well it’s hard to achieve that. And I think we can all agree that it’s hard to achieve it technologically. It gets much much easier to get rid of proof of work and get rid of proof of mining if you have some degree of centralization. So what if you said the goal was no longer to be completely decentralized but we still want to make sure that no one actor in the network can hack the system. So the bank if there’s control fraud and everybody on the board of directors and management of the bank is dirty and they’re trying to commit a crime they can’t do it because the system secures against it. But the network itself has some centralized components. Well the bitcoin crowd would say no way on anything centralized because the goal of bitcoin is to make sure that it is in penetrable by governments.

: [00:21:54] You can have the bitcoin network and governments might not like it. They might try to outlaw it and it’s going to keep working whether the government likes it or not. What if someone else said you know what my goal is not to usurp the power of government. My goal is just to make sure the bank can’t hack the system. I’m willing to accept a small degree of centralization just in terms of how this protocol works for figuring out who has a proof of stake or who has control the system as long as no one actor can corrupt the data without the consensus of everybody else. The Bitcoin crowd would say that’s no good because as soon as there’s any centralization we’re giving power to government we don’t want government to have power screw them. That’s the bitcoin perspective. I personally happen to agree with that. I think it would be great to keep government out of our lives. That’s my own view.

: [00:22:42] I think a lot of other people are going to say hey if we don’t focus on preventing governments from being able to control this thing which unfortunately I think they’re going to control anyway then we can solve this proof of work problem much more easily if we don’t have to be truly decentralized in the most rigid definition of that term decentralized. So I think that’s going to play a key in this. What do you mean by decentralized ledger. Do you mean that you decentralize it in the sense that the bank can’t commit to control fraud or you bully decentralize it in the sense that no government could ever interfere with it even if they had the legislative power that supposedly said they could. Those are very different questions and I think that’s an important distinction.

: [00:23:22] Thank you Eric. Very interesting questions indeed. Toure Yeah.

: [00:23:26] So there’s a lot to comment on.

: [00:23:28] First of all you know I think that we already have seen in the past hundred years a lot of experiments with how to improve upon central banking people organizing committees of federated systems like UCB and then there is supervisory organs and those kind of things. Yet at the same time you know financial policy is you know as opaque as ever. Money printing. It’s happening from a point of view of reliability. I would say there is you know there is improvement possible there if you want a more gold like asset as a currency I think then you probably don’t want to go stay. So let me back up a little bit and just give my brief you on what it is that the idea is that rather than letting anybody vote arbitrarily on what the state of the ledger is we’re going to say well if you can prove they own a certain amount of tokens that represent a share of the money supply then you get. And accordingly lards vote as to what is going to be the final version. So whenever there’s a disagreement we’re going to vote based on the people that had the most money. And of course there’s criticisms that it’s kind of like an oligopoly. Things like that. I don’t think those are the strongest. I think from a security point of view it’s very concerning because it’s obviously optional to vote or not. And so if only 10 percent of the money supply for example is state so is used the votes.

: [00:24:59] That means that 90 percent is floating around and is available for other people to borrow and then for a brief amount of times launch a massive attack on the network. And once you know something that’s not often reported is that a proof of stake attack means that you can change the entire letter. It’s almost like a coup d’etat like you can no matter what the Constitution was if you were an end there and you in control you can go back and change even the very earliest transactions which is not possible or at least not as cheap in the work world. So the big problem of those systems is who is going to guard the guardians. And you know you can always say oh no no worries we have all these systems in play and then say Well yeah but what is the supervision. And then you basically get a bureaucratic system which is very expensive. And my argument is that well aren’t you just creating an obfuscated proof of work system where yes a lot of entities spend to maintain security and to the extent that you don’t do it and you don’t have all your checks and balances in place you have huge vulnerabilities were I mean for example you can say oh well you know the stakeholders are very reliable we can trust them. OK well what if somebody steals the.

: [00:26:07] All of a sudden another actor has control over most of the network. Another argument I heard Eric say is that you know the smartest people in bitcoin are moving to these alternative ledgers. I want to take issue with that. I have the past four years for example in looking around to see and I’m trying to say this in the most objective way possible you know which developer of high pedigree is working on Ethereum for example and with high pedigree I mean people who have significant recognized performance in a domain other than Ethereum right because the theory is kind of like self reinforcing. Like you need some external standard like they have achievements in the area of cryptography of memory compression which is a big issue and blocking systems building the Internet for example have they build components of the existing decentralized internet. This is the sea and you know are there any skills that they’re bringing along. And the answer was it was basically crickets. I didn’t find anyone and I’m still looking I’m still open and then compare that to bitcoin for example and Bitcoin. You know one of the earliest people who ran bitcoin the first person to run Bitcoin was how Phinny he was one of the earliest P2P developers he created the first reuseable proof of OHRC system. Adam back of course works on Bitcoin. The inventor of the proof of work mechanism he was credited in the Tor white paper.

: [00:27:29] I mean for I think that’s another example of a successful decentralized project. Nick SABL is the inventor of smart contract terminology the digital gold concept. He recently presented research on improving network resilience. Alex Moore cause co-founder of Hudson River trading which is responsible for 5 percent of all stock trading in the U.S. is the largest sponsor of the current for development. Christopher Allen co author of the standard used by 30 per cent of web traffic globally. I mean I could go on and on. So these are the kind of people that are working on bitcoin specifically. That’s the kind of pedigree that I would be looking for if I want to see a resilient system.

: [00:28:11] Ter I just want to ask you Nick CEVO always talks about security security security and if you don’t understand security you don’t understand bitcoin. What does he mean by that.

: [00:28:21] Well I don’t know if I can speak for him because I definitely don’t put words in his mouth but I totally agree when he says that first third parties are security holes and basically security it’s like it’s the foundation of everything. If you have a ledger if it’s compromised in any way then potentially billions or trillions of value is a risk like the big corn block thing I don’t know what the size is I think it’s smaller than five gigabytes. You know it is just a file. It could be on anybody’s desktop. So if you can find a way to hack into that and compromise it. It’s the biggest of issues and if you think about you know we want to build this future this may be like the centralized Internet. We want to unbundle financial services and tend to do it differently and give more autonomy to the user. Well the bases of that bottom layer are the anchor is going to have to be security right now if you want the public at large to entrust any thing of economic significance onto this ledger you better make sure it’s pretty much on hackable. That’s what comes up when I hear that.

: [00:29:23] So Eric what’s interesting is your argument saying that you don’t need the proof of work to be fully distributed here. What I find interesting is your point was maybe it’s just like Hua’s I fully distributed and you still get a lot of the security aspects with the stake. What I find interesting is what’s happening in bitcoin right now is you’ve got the lightning network that’s being stood up and it’s almost like a hybrid between what both of you guys are saying but at the very foundational level you still have proof of work. So I’m kind of curious whether you think that that still would work if you think that that approach is kind of solving the scaling issue that you brought up earlier or do you think that there’s just going to be this alternate coin that’s proof of stake and it’s going to triumph over that model that the Bitcoin community is trying to use as their scalings solution.

: [00:30:11] Well I think a key to that answer actually goes back to what Turse said just a minute ago so I want to come a little bit further back what Kurt said before is hey the real heroes the guys who seriously have credibility and credentials are working on Bitcoin. And I agree very strongly with what Tor said but I’m going to put it in a slightly different perspective. The guys he’s talking about are the proven heroes of the movement to use computers and encryption technology to protect us from the overreach of government. So people who designed something like TGP one of the first private security tools for encryption that allow people to keep the government out of your email. So the NSA can’t read your e-mails as we all heard about from from Ed Snowden. All of the heroes of protecting us from overreach of government are working on Bitcoin. And I agree wholeheartedly that Bitcoin is where it’s at in terms of the effort to insulate average people from overreach of government and allow them to control their own finances and keep the government out of it. The guys who are heroes in that space are all working on bitcoin and I think they will continue working on Bitcoin. And I want to be clear too. I personally think that’s great and I hope that they win that the bitcoin effort is successful at protecting us from overreach of government and changing the world.

: [00:31:36] I think that’s the best outcome. And I therefore hope to be proven wrong on everything else I’m going to say for the rest of this interview but unfortunately if you don’t have the agenda that those guys have if you’re not worried about protecting us from overreach of government if you just want a distributed electronic payments system a digital currency system which doesn’t allow any one actor to hack the system but it has some degree of centralization that governments still can oversee the system it gets a lot easier technologically to overcome the requirement for proof of work if you’re willing to accept that limitation. And unfortunately what I think is going to happen is we’ll get to is governments have more power than all of these guys that are so smart about inventing things like TGP they can outlaw a first generation crypto currency like bitcoin if they want to. And I think we’ll eventually get to state back to digital currencies that are going to have very different characteristics. We should probably save that for later on when we get to that point when we start with the bitcoin currency first.

: [00:32:40] Well I’ve got a question for you Eric. Do you feel like the longer that we have these other financial products like derivatives and soon we’re going to have ETF Sidor stood up around the crypto currency that makes it that much harder for governments to shut it down. I kind of feel like the longer that we go down this path in government doesn’t step in the harder it is for them that kind of BNA an outline. I’m kind of curious to hear your thoughts on that.

: [00:33:04] I don’t think so unfortunately. I mean to some extent it’s true that the more that you have these things the harder it becomes for them. But I think that the world is going to change in dramatic ways.

: [00:33:17] The big enabler is not so much you know is there an ETF or not it’s when governments get their heads around what they could do using technology to advance their agenda which I contend is going to be very opposite the bitcoin agenda. I have said the future is not the Bitcoin currency it’s a different digital currency that I call the Orwell and it has all the opposite features of bitcoin and we haven’t really gotten into the features of bitcoin yet. But my view is that the government invents something that’s opposite they outlaw bitcoin and they go with what they want and it doesn’t have all the same features of Bitcoin. And one of the aspects of not having true decentralization it’s a requirement of Bitcoin because Bitcoin needs to circumvent the ability of governments to control it if you’re not trying to achieve that. The technical challenges are much less and it’s going to be easier technologically to build that government controlled network than it’s going to be to build a government immune network which is what bitcoin sets out to do.

: [00:34:19] All right so let’s step back here and talk about big kind so big bill built on top of the block chain just alleged that we started out this interview talking about and let me throw it to you so you obviously a fan of bitcoin and your long term bull. Could you explain why. And let me just stress you’re a long term bull on our because we’re not talking about won’t have in the next three or six or 12 months or so.

: [00:34:45] Bitcoin really in essence is a proof of energy Spence. It’s a protocol that converts electricity into financial liability. And you know it’s a goal really that’s what it does.

: [00:34:59] Despite all the problems it has and the risks that are associated with it I would say Quinn has done a damn good job as nine years. The up time for example of the big one network is higher than ninety nine point ninety nine per cent and that’s higher than most. All of that yet earned sees the network has never been hacked. Despite all the worries about Chinese miners being in control. To our knowledge no codes and this is verifiable no code from Chinese miners or other special interests have ever been inserted into the Vickerman protocol. So if and I suppose the bitcoin is pristine it’s only intact and predictable and it will be for the next few years. It’s true that Bitcoin the main layer Picone is slow it can only process 7 transactions per second. But in my opinion it’s a fantastic first layer is a value anchor or a stack of protocols that will be built on top. And to me that’s the answer to all this confusion about is the quintessential goal is a task which one is it. My argument is that it’s both. It’s just that you have different functionalities depending on where you are and the stats of the lightning network. Those bitcoins there are real bitcoins that are circling there they have different features. They’re a lot faster.

: [00:36:13] They have a little bit higher security risks than the big guns in the main chain lightning network a smart contract layer it can process thousands of transactions per second. Also it offers much better privacy actually and it’s almost infinitely scale. So I think the Lindi effect is really at play here where the longer something anes holds the lower the chances are that it’s going to go away. And to me the real breakthrough is proof of work. And that’s why also people call me a bitcoin maximalists. I don’t think need a hundred different loftiness they use of words. Because really you’re trying to convert just getting into financial reliability. You’ve got to have positive network effect. And so it’s likely that it’s going to remain the most dominant currency and then in terms of government control. I see it as the bit or end of the financial world in the sense that it’s like BitTorrent. You can shut it down at some point. BitTorrent had almost 70 percent of web traffic. But what you can do is you try and build an alternative answer to it. Maybe like an iTunes or something like that. And so I do think that governments are going to come up with their answer whatever that might be Bitcoin. And I think so that’s going to change the world.

: [00:37:25] We are going to have an engine or if a government comes up with let’s say the U.S. government comes up with their own crypto coin that’s the dollar at that point. The government still has complete control over the protocol and so like if they want to adjust the monetary baseline they can still adjust the monetary baseline so whenever I see these countries that are saying that they’re going to do their own crypto coin. I just kind of smiles like Bill isn’t that’s kind of missing the whole point of all this the whole point is that it’s completely decentralized so I’m assuming you agree with me. TER I’m curious to hear Eric’s take on that idea.

: [00:38:01] Unfortunately I think it’s even worse than you imagine because you’re right that the goals of bitcoin which are to be totally decentralized and to prevent governments from doing things they shouldn’t be doing.

: [00:38:15] I think governments will look at this space and say hey wait a minute we can engineer a totally different kind of digital currency that enables us to do things that we couldn’t do previously. They can’t use substantially negative interest rates as a monetary policy tool in the current system because that encourages hoarding of cash. You get cash hoarding and it potentially creates a run on the entire fractional reserve banking system. But if you design a global replacement for the U.S. dollar as reserve currency which is a digital currency designed by and for central bankers it basically outlaws cash and it enables negative interest rates as a monetary policy tool. So there’s lots of things that they can do that give governments even more power to do the things that Bitcoin was designed to prevent them from doing. But it’s a question of who’s in charge and I think of this like a space race or an arms race. You know if you see bitcoin doing this I think governments take the other side and say wait a minute how do we use all of these cool digital technologies that the bitcoin crowd has thankfully showed us how to use what they’ve done a huge amount of innovation and pioneering work here. How do we turn this all around into something that advances governments interest rather than the interest of people who want to protect individuals from the overreach of government. And the answer is they can do a lot. There’s so much that they can achieve with digital currency that they can’t do with conventional currency system.

: [00:39:44] How would you think through let’s say the some of these large governments come out and they ban it they make it illegal. But then I mean how many countries are there in the world. Not all of them are going to take that same approach. So that means that Bitcoin might continue to exist in some of these smaller countries or even large companies that wouldn’t be on it. Do you see that as a likely scenario that we’re going to have some countries that won’t be in it and still be using bitcoin.

: [00:40:09] Oh I think that what’s likely to happen is bitcoin and other crypto currencies that we see today will be around and will be allowed to continue to exist until governments have an alternative. Why would you take on the political flak of shutting down bitcoin until you have something to gain by saying our government backed digital currency is the thing that we’re going to use instead. So I think that first generation crypto currencies which is what I’m calling bitcoin and a theory am and all the other things that are based on a block chain. I see them continuing to exist and eventually you get to the point where governments say OK what we need is a government backed thing we’re going to decree that bitcoin and Ethereum these are the tools of terrorists who scare everybody. Terrorism bad we need to protect you the people from terrorism. So we are going to outlaw bitcoin and those few libertarians that you’d know who made so much money on it were going to punish them so you can get even with those people you felt jealous of for having bought bitcoin before you heard of it. And we’re going to have a government backed crypto currency that’s fair and safe and it prevents tax cheats and it prevents drug dealers and terrorists from using. Now that’s all a bunch of B.S. as far as I’m concerned but I think it will sell very well and I think that it will enable governments to get away with taking over the crypto space with something designed by governments and the currency that I envision I call it the Orwell. It’s the opposite of Bitcoin. Every single transaction is traceable and controllable by and every single payment has to have the tax ID of both the payer and the pay. Every single transaction can be voided or clawed back by the government if they want to. It’s the opposite the antithesis of bitcoin and I think it’s I’m not advocating this. I think it’s a horrible horrible thing. I’m predicting a libertarian Holocaust and I hope that I’m wrong. But that’s the way I see this going.

: [00:42:07] So let me ask you this. And I see what you’re describing playing out in some countries but I don’t see it playing out in every single country. And so let’s just say I’m going to go through a scenario here. Let’s say that the Cayman Islands or that I can control what happens in the Cayman Islands and I say hey if you’ve got bitcoin we’re Bitcoin friendly in this country. Now I might be wrong about this but I think if it would be banned or outlawed in whatever country there has to be some type of grace period especially as we got derivatives and all these other financial products that’s what we saw in China where it was 30 days or whatever this is all going down. I think if you had people that had substantial wealth in this stuff guess where they’re going. They’re going to go to these countries that would facilitate this and then the battle would begin at that point. Let me throw it over to third. Is that how you would see something like this playing out toward U.S. completely different than than what I’m describing or what Aerex describing. I just want to hear your thoughts.

: [00:43:03] Yeah first of all I think the scenario that Eric is painting is very bleak. And if any attempts were to happen in that direction I would see that as a bearish phase in an overall secular trend towards basically what technology has done or hundreds of years which is to empower the individual. To me civilization is creating order in a chaotic environment and technology amplifies that like mobility is getting cheaper safer easier. So the things that you’re describing like you know some safe haven countries or those effects should become pretty readily visible and you already see that in Iceland for example where I think 5 percent of their electricity consumed in Iceland is not going to be quite minor. So you know they’re starting to get political clout in some countries information flows are a lot cheaper and faster so remote working is easier. Legacy systems are continually being disrupted. We’re really like this term by Fred Wilson from ABC who talks about unbundling. So for example there was that television stations are maybe five stations and then now we have uju where there is basically a million television stations so in the same sense I think that you know medical care is being unbundled and services will be unbundled energy production storage and so on. So that’s the overall trend I’m seeing and bitcoin empowers the individual because whereas in the past if you were some kind of refugee you had to hide maybe gold coins in your shoes or diamonds in your you know them in your coat.

: [00:44:35] Now you can just remember a brain wallet you can just remember a phrase and that will give you access to your phones no matter where you go. And so I think that the fact that that is there and especially if they can keep growing because right now I mean let’s be honest Signy 150 billion dollars it’s the money supply of the ruble. That’s where bitcoin is. So I think that it’s going to have a disciplinary effect on the world just like BitTorrent had a disciplinary effect were people were just fed up with paying twenty dollars for a CD. So the industry change and now you pay what is it like five dollars for almost unlimited music a month. So I’m an optimist. I do think there will be some backlash and there will be attempts to come up with an answer. But usually governments are not very good at creating appealing technology and I think that is really opening up this market for currencies where people are going to decide like do I want to use this currency. It’s an ICAO. I don’t really care if it’s a government Fortune 500 company or a startup. I’m gonna try and judge it by the technology rather than who’s who’s back.

: [00:45:39] All right so this is where we’re going to stop the tape for this week. I hope you guys come back and join us for the second part discussion between her and Eric as you can see these guys are absolutely brilliant in their own right on both sides of the issue. Hopefully we’re not confusing anybody with providing both sides of the argument. We just kind of feel like if you can hear two strong arguments on both sides you can form your own opinion internally as to how you see this. And hopefully this conversation is really helping you determine that on your own. So we appreciate you guys listening in and we look forward to having you guys back next week.

: [00:46:14] Thanks for listening to IP to access the show notes courses for forums. Go to the investors podcast dot com. To get your questions played on the show. Go to Aspe investors dot com and win a free subscription to any of our courses onto IP Academy. This show is for entertainment purposes only. Before making investment decisions consult a professional. The show is copyrighted by the IP network and written permission must be granted before syndication or rebroadcasting.


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