🔑 Key Takeaways
- Bitcoin's impressive investment returns over the last decade have not settled the ongoing debate over its status as money, investment, or potential global economic disruptor. Becoming an Acquired Limited Partner can provide access to insightful resources for building successful companies, while Tiny offers entrepreneurs a path to profitable growth.
- The current financial system is vulnerable to fraud and theft, but understanding its limitations can spark innovation towards building more secure, reliable and efficient payment systems, possibly utilizing emerging technologies like blockchain.
- Bitcoin's design for the internet provides a secure and fraud-proof way to transfer money, while the traditional system has a tax on the system to prevent fraud. Exploring Bitcoin as a solution for the future is valuable.
- The Automated Clearing House processes payments automatically, but credit cards cause debt and debit cards are limited. To meet the demands of the modern world, a faster payment system that does not use credit and offers instant payments is necessary.
- The rise of internet payments led to the emergence of new payment infrastructure such as Stripe, Square, and Venmo, which made accepting payments online easier and more secure. Previous attempts at digital money failed due to centralized systems and limitations.
- Bitcoin was designed to address the flaws in traditional financial institutions, offering a decentralized, verified, and authentic solution to the problem of non-reversible transactions and third-party mediation. Its purpose is to provide a better payment and currency system for the internet.
- Bitcoin's peer-to-peer distributed timestamp server ensures the validity of transactions by creating a distributed ledger, making it impossible to alter previous transactions, which is critical for the trust and success of the system.
- Bitcoin's unique system of accounts and network effect economy create a sustainable and secure currency that eliminates risks associated with traditional finance. Additionally, the computing power involved in creating and verifying transactions prevents fraudulent activity and forgeries.
- Bitcoin's secure system relies on one-way functions and public/private key encryption, but there is a risk that breaking these methods could jeopardize not only Bitcoin, but all security systems.
- Through simultaneous discoveries and advancements in technology, blockchain mining has created a network economy value growth by allowing for legitimate transactions and inspiring the creation of alternate cryptocurrencies. Getting an early start and growing the network is crucial for success.
- Bitcoin's anonymity allowed for illegal transactions, leading to its growing popularity and exchange rate with US dollars, but also raised questions about its safety and regulation.
- The Silk Road's success in facilitating Bitcoin transactions brought legitimacy to the digital currency, but also highlighted the ongoing issue of illegal online marketplaces and the consequences of their operations.
- Protect your private keys to keep your Bitcoins secure. Early adopters hold a significant amount of Bitcoin, affecting supply and demand and pricing. Depend on reputable exchanges to purchase and exchange Bitcoin.
- Mt. Gox's security breach and illegal activities hindered Bitcoin's mainstream acceptance, but also led to improvements in security measures in the crypto industry.
- Coinbase provides a secure and user-friendly platform for accessing and managing cryptocurrencies, catering to those who may not have the technical expertise to handle their own private keys. Its success lies in its ability to balance accessibility with security.
- The Winklevoss twins' investment in Bitcoin, along with others like Coinbase, has helped the cryptocurrency become an accepted asset class for institutional investors, leading to increasing adoption and rising prices. The future looks promising with secure infrastructure being developed for accessibility.
- Early-stage investment in cryptocurrency can generate high returns, while ICOs offer a new way to raise non-dilutive capital. Careful investment strategy and research are essential in navigating the unregulated market.
- Bitcoin's value has been marked by ups and downs, with hype, speculation, scammers and inflated prices. However, mainstream companies allowing crypto trading, and government stimulus spending has contributed to its recovery and overall stability.
- Bitcoin's fixed money supply is a popular choice for individuals and institutions seeking high returns and a hedge against inflationary monetary policies, driving its increasing legitimization and mainstream adoption.
- As more and more institutional investors buy into Bitcoin, its network effect and self-fulfilling prophecy drive up demand and attract further investment. This creates greater stability in the market, even after bubbles burst, leaving behind enhanced infrastructure and advancement.
- Despite Bitcoin's volatility, its market cap shows significant value and potential as a new money system, fueled by its network economies and ability to compete with traditional assets.
- Bitcoin's network economy and smart contracts give it an edge over other cryptocurrencies, while the traditional banking system would find it difficult to switch to a public-private key system. Ethereum is the only competitor.
- Printing more US dollars may lead to hyperinflation and countries may opt for a different asset as their reserve currency. Bitcoin, with minimal inflation and a scale economies industry, can be a valuable asset. Switching costs are low in the cryptocurrency industry, with no significant brand power.
- To gain broad acceptability, Bitcoin must possess key characteristics such as being scarce, portable, fungible, divisible, durable, and offer utility as a unit of account, store of value, and medium of exchange. However, its main challenge is to overcome the head start enjoyed by fiat currencies like the USD, which are backed by powerful governments and supported by established networks.
- Bitcoin has advantages over USD as a durable, digital, decentralized, and censorship-resistant currency that can potentially serve as a store of value like gold. Recent events have led to a growing interest in Bitcoin as a hedge, although it is still viewed as a complement to, rather than a substitute for, USD and other assets.
- While Bitcoin was created to replace internet payments, it exists in a different stack level. Bitcoin's blockchain can securely transfer infrequent large amounts of value, but internet-native systems are needed for frequent payments. Although computationally inefficient, if it unlocks new value for humanity, it's a clever breakthrough.
- Focusing on building a network effect can help businesses and startups grow quickly by incentivizing usage and rewarding value within the system. Capchase allows for financing growth without taking on debt or dilution.
- While new monetary systems like Bitcoin offer benefits, we must also consider their environmental impact and potential political ramifications, and weigh the trade-offs before embracing them fully.
- Investing in Bitcoin comes with volatility and requires a specific timeframe, but it offers asymmetric upside and has driven innovation. As society becomes less government-owned, there may be destabilization but also greater opportunity for the oppressed to be un-oppressed.
- Bitcoin has become an attractive investment option due to its potential for growth, high volatility, and ability to hedge against cash inflation. Investing in Bitcoin is similar to investing in a growth-stage company with a potential for even more growth in the future.
- While gold may move beyond being a store of value to becoming a reserve currency, its expansion is not impossible. Keeping an open mind about future possibilities can lead to exploring potential industry shifts to inform investment decisions.
📝 Podcast Summary
The Debate over Bitcoin's Value and Future Continues to Divide Experts and Investors
Bitcoin has had the greatest investment return over the last decade, going from less than 1 per bitcoin to over $30,000, marking a 3,000,000X investment return. The system behind the Bitcoin protocol is truly beautiful and ingenious. However, whether Bitcoin is a new form of money, an investment opportunity, the start of a new global economy, or just a scam is still up for debate. Becoming an Acquired Limited Partner will give you access to deep-dives and interviews on company-building topics, live access to listen in while they record big events, and monthly Zoom calls as well as be a part of a great community. Tiny, the presenting sponsor for all of season eight, also offers entrepreneurs the possibility of being a profitable business every year while achieving high growth.
The Need for a More Secure and Efficient Payment System
The current financial system is vulnerable to fraud and theft, as sensitive information like bank account and credit card numbers are easily accessible by others. This vulnerability also highlights the inefficiencies of current payment methods, such as check, credit cards, and even government-provided tax payment portals. To address these issues, there is a need for a more secure and efficient payment system, possibly utilizing emerging technologies like blockchain. Understanding the limitations of the current financial system is important, as it opens up opportunities for innovation towards building more secure, reliable and efficient payment systems.
Advantages of Bitcoin over Traditional Financial System
The traditional financial system was not designed for the internet and despite all the crazy hacks, it still works because the number one goal is that it keeps working, which is the foundational underpinning of our economy and democracy. However, with the advent of Bitcoin, there is a system that is natively designed for the internet and can work just like email, providing a secure and fraud-proof way to transfer money. The traditional financial system has a huge tax on the system due to all the institutions working to prevent fraud, which is a result of the account number being everything. Bitcoin offers a more efficient and valuable solution that is worth exploring for the future.
The Need for a Faster Payment System
The Automated Clearing House processes payment wires and checks automatically using computers. Credit cards were created to provide faster payments by extending credit, which led to consumer debt. Merchants accepting credit cards have to pay fees and wait for the money, causing cash flow issues. Debit cards were created using similar technology but had limited speed. However, with the internet, more financial transactions take place in various locations. Therefore, financial institutions need to create a faster payment system that does not use credit, offers instant payment, and is accessible to consumers and merchants alike.
The Evolution of Payment Infrastructure on the Internet
The increasing complexity of payments on the internet led to the emergence of new layers of infrastructure on top of old traditional banking systems, such as Stripe, Square, and Venmo. Previous attempts to design new protocols from scratch for digital money, like DigiCash and E-gold, failed to take off. PayPal almost succeeded in creating internet-native digital money, but its centralized system and US dollar denomination limited its potential. The financial crisis of 2008 and the exponential growth of internet payments drove people to seek alternative opportunities. Despite the archaic and complex monetary stack and internet protocols, companies like Stripe managed to make accepting payments online easier and more secure.
Bitcoin's Innovative Approach to Digital Payments
Bitcoin was originally designed to provide a native payment and currency system for the internet without the inherent weaknesses of the trust-based model involving financial institutions. The early problems that Bitcoin aimed to solve were those of completely non-reversible transactions that required third-party mediation and increased transaction costs. The public-key encryption that underlies Bitcoin was already known and applied in other contexts, but the problem of double-spending was yet to be solved. Bitcoin's unique solution to the problem involves a decentralized system that exists outside the traditional financial system and is fundamentally better because it's verifiable and authentic. Bitcoin is not an alternative asset class immune to inflation or decentralization that evolved over time; rather, it was intended to solve a specific problem in the digital payments industry.
Bitcoin and its revolutionary technology
Bitcoin is revolutionary because it creates scarcity with software on the internet, which was previously thought impossible. Satoshi proposes a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions, which creates a distributed ledger where everyone has a copy of the transaction history on their computer. People who choose to be part of the network can verify the integrity of the transactions by doing math and checks and propagate the valid transactions to the rest. The system is designed to make it computationally hard to prove the correct order of transactions, and the blocks are cryptographically chained to the previous block, making it impossible to change or fake previous transactions without re-computing the entire chain.
Bitcoin's Network Effect Economy and Computing Power Ensure Sustainability and Security
The network effect economy of Bitcoin makes it impossible to forge and crack due to the immense computing power involved in creating new blocks and verifying transactions. The system of accounts is such that there is a high level of trust and authenticity in transactions, eliminating the risks involved in the traditional financial system. Miners are compensated for their work in verifying transactions and creating new blocks, and the value of Bitcoin is derived from the work itself. Bitcoin is a finite currency with a predictable schedule for new coins to be mined using a halving function. The system is sustainable and secure due to its network effect economy and computing power.
How Bitcoin uses cryptography for secure transactions
Bitcoin operates on a system of integrity, ensuring that all transactions are combed through and resulting in a big chart of accounts where bitcoins are securely stored. The cryptographic work behind Bitcoin involves the use of one-way functions that are easy to do in one direction but difficult to undo in the other direction, making it easy to check someone's work but hard to stumble upon the initial numbers without any other information. The public/private key encryption concept is based on prime factorization and was discovered in 1973 for defense, but is now used for secure messaging in Bitcoin and other applications. However, the reliance on one-way functions is not provably sure and breaking it would break not just Bitcoin, but all security.
History of Encryption and the Emergence of Blockchain Mining
The concept of private/public key encryption was discovered simultaneously by different people between the same decade, and RSA encryption was publicly announced in 1977. With the advancement of technology and modern math, two different groups could invent the same thing simultaneously. Blockchain mining creates scarcity and allows legitimate transactions to happen, leading to a network economy value growth. This system has inspired many people to create alternate cryptocurrencies with varying levels of success. Having an early lead and growing the network is what starts the snowball rolling, which makes it less likely for anyone to catch up. Satoshi Nakamoto bootstrapped the Bitcoin system, coded and mined the first block and created version 0.1 in January 2009.
The Origin and Impact of Bitcoin's Anonymity.
Bitcoin was created by an anonymous person/group named Satoshi Nakamoto, who disappeared after transferring control of the open-source repositories of the project. Satoshi remained untraceable and never revealed any personal information about themselves, making it difficult for anyone to know who they really were. In 2011, interest in Bitcoin grew significantly, and a little service called Silk Road was launched, which became the first killer app for Bitcoin. Silk Road operated as an online black market, and people could purchase illegal stuff, including drugs, and pay with Bitcoin. The anonymity provided by Bitcoin made it the perfect medium for such illegal transactions, and it gained popularity in the market, leading to the growth of Bitcoin's exchange rate with US dollars.
How the Silk Road Boosted Bitcoin and its Dark Consequences
The Silk Road played a significant role in boosting the Bitcoin network by facilitating over 1.2 million transactions and almost 4000 unique sellers using the platform, transacting almost 10,000,000 Bitcoins. The illegal online marketplace's success is largely credited with advancing Bitcoin's level of transactions and participants and cementing its integrity and certainty. The Silk Road began with a non-traditional business model where you paid to create a seller account, but eventually, it shifted to a traditional marketplace with businesses taking a cut of every transaction. The platform's founder, Ross Ulbricht, was arrested and convicted of various charges related to money laundering, computer hacking, conspiracy to traffic narcotics, and more. He is now serving a life sentence without the possibility of parole.
The Importance of Private Keys and Exchanges in Bitcoin
Bitcoin is gaining more interest due to its involvement in media stories such as the Silk Road case and the FBI's seizure of 144,000 Bitcoins, which were later auctioned off. The loss and theft of Bitcoins highlights the importance of keeping private keys secure in the decentralized Bitcoin system. A substantial amount of Bitcoin is owned by early adopters and is not actively trading, which affects the supply-demand equation and influences its price. Exchanges play a crucial role in facilitating the purchase and exchange of Bitcoin, and Mt. Gox was the primary exchange for a substantial part of Bitcoin's early history.
The Rise and Fall of Mt. Gox: A Lesson in Bitcoin's History
Mt. Gox, initially created as an online exchange for Magic: The Gathering cards, was later repurposed and became one of the earliest Bitcoin exchanges. After its creator Jed McCaleb sold the exchange to French programmer Mark Karpeles, Mt. Gox suffered a major breach and lost about 2500 bitcoins due to human error. Despite several issues, Mt. Gox remained dominant and handled about 70% of all Bitcoin transactions for the next year and a half. The problems associated with Mt. Gox, including its involvement with illegal activities such as the Silk Road, hindered Bitcoin's mainstream acceptance. However, the incident resulted in improvements in security measures in the crypto industry.
Coinbase - An Accessible and Secure Cryptocurrency Exchange
Coinbase was built as a response to the inadequacies of Mt. Gox. It is a secure exchange and cloud wallet that maintains private keys for its customers. While this model goes against the decentralization ethos of Bitcoin, it makes cryptocurrencies more accessible to the average user who might not be adept at managing and securing their own private keys. Institutional investors and big players in crypto still handle their own wallets. Coinbase has found a way to balance accessibility with security, making it a legitimate exchange that people trust to use. Coinbase was founded in 2012, raised their seed, from Initialized and angels.
The Winklevoss Twins' Impact on Bitcoin & the Rise of Institutional Investment
The Winklevoss twins, who had sued Mark Zuckerberg over the creation of Facebook, took their settlement money in Facebook stock and later invested in Bitcoin, building Gemini exchange specifically for institutions. Their insights and efforts, along with others like Coinbase, have helped Bitcoin become an increasingly accepted asset class, attracting institutional investors. Through all the volatility and bubbles, the price of Bitcoin has continued to rise, with each new high becoming the new floor price. The future looks bright for Bitcoin, as more institutions enter this ecosystem, thanks to the infrastructure being built to make it secure and accessible to both retail and high-value investors alike.
Investing in Cryptocurrency: Early-Stage Investments and ICOs
The early-stage investments in the cryptocurrency market can generate huge multiple returns, but it is not possible to put many dollars in the early-stage investment. Companies like Sequoias have figured out to put dollars to work early and keep putting dollars in subsequent rounds as companies grow, get proven more, and the TAM expands. Cryptocurrency may be just a way to store and transfer value, but with the arrival of ICO, it became a new way to raise non-dilutive capital for startups. Though it is unregulated, everyone and their mother were launching ICOs in 2017. Some of these ICOs raised millions of dollars within seconds. Holding or hodling became an internet meme for cryptocurrency investors.
From Hype to Stability: A Rollercoaster Journey of Bitcoin's Value
Bitcoin's rise and fall in value from 2017 to 2019 was marked by a lot of hype, speculation, scammers, and inflated prices. However, the market stabilized with the intervention of regulators and the exit of scammers. In 2019, mainstream companies like Square and Robinhood started allowing crypto trading, and the prices of Bitcoin began to recover. Then, the COVID-19 pandemic hit, and the world went into a liquidity run, causing the price of Bitcoin to crash. But it quickly recovered, as the Fed and the US government started printing money, with 22% of all US dollars in circulation created in 2020. This high stimulus spending caused the US debt to GDP ratio to rise to 135%, and we entered a 0% rate environment.
Bitcoin's Rise in Popularity as an Alternative Asset in the Current Economic Climate.
The current economic environment with quantitative easing and zero interest rates is leading to more capital seeking high returns, which is driving the legitimization and increasing appeal of alternative assets like Bitcoin. This trend is being fueled by both individuals and institutions, including hedge funds, investment firms, and even operating companies who are now diversifying their treasury reserves into Bitcoin. Unlike traditional investments, Bitcoin's fixed money supply ensures that it cannot be devalued by inflationary monetary policies. As more infrastructure is built up around Bitcoin, it is becoming an increasingly institutional asset class with greater mainstream adoption. This perfect storm of economic conditions and increasing legitimization is driving Bitcoin's rise as a store of value and investment opportunity.
Institutional Investors Drive Demand for Bitcoin
Bitcoin's market cap is currently at around $650 billion. Institutional investors are driving up the demand for Bitcoin, with close to $1 billion of inflows flowing into this asset class. Bitcoin requires a network effect to be valuable, and it is a self-fulfilling prophecy in a lot of ways. Every time there's a run-up in price, it attracts more and more institutional capital and more infrastructures get built up. When the bubble bursts, the infrastructure and advancement made from the hype remain. This time, big chunks of demand are driving up the price, with institutions like Square and MicroStrategy holding Bitcoin as a treasury reserve or for diversification. The presence of institutions has created more stability in the Bitcoin market.
Bitcoin's market cap compared to traditional assets, US money supply, and global currency.
Bitcoin's price has been volatile, but its market cap of $650 billion implies significant value. It is interesting to compare Bitcoin's market cap to that of JPMorgan Chase, which has $3 trillion in assets. Bitcoin's market cap is also about halfway to $1 trillion compared to the US money supply of over $20 trillion and the total money supply of all global currencies, which is about $70 trillion. Bitcoin's power comes from its network economies, which allow it to outcompete its closest competitors and give it significant power as a new money system.
Bitcoin's robustness against attacks and traditional financial institutions' counterposition
Bitcoin's network economy and incentives for miners make it robust against attacks. The US dollar and traditional financial institutions are counter positioned against Bitcoin's decentralized strategy and network economy. Switching to a public-private key system would be hard for the traditional banking system, but not against their interest to do it. Existing governments who have fiat currency have bundled the safety security and amount of normalcy of the nation with money. Bitcoin's value is in smart contracts and compute built into it, which is not the case with other cryptocurrencies. Ethereum is the only one that stands a chance against Bitcoin.
The Impact of Printing More US Dollars & the Potential of Bitcoin as a Valuable Asset.
Printing more US dollars hurts countries outside the US more than it hurts the US itself. If the US continues to print more money, it may lead to hyperinflation and countries may switch to a different asset as their reserve currency. Bitcoin is considered a cornered resource and has minimal to no inflation in the long term, making it a valuable asset. Mining Bitcoin requires dedicated hardware and data centers, making it a scale economies industry. Switching costs between cryptocurrencies are low, and there is no significant brand power in the cryptocurrency industry.
The Importance of Broad Acceptability for Bitcoin
The government-backed currency like USD has an enormous head start over any other currency in terms of power and network economies. Every person in the country must own USD or use it, and the government pays its debts in that currency. The government contractor industry is a large part of the US economy. Money is a unit of account, a store of value, and a medium of exchange, with the only value of currency depending on collective belief. Bitcoin must be scarce, portable, fungible, divisible, durable, and broadly accepted to be useful. Broad acceptability is the main issue with Bitcoin.
Bitcoin's Advantages Over USD and Its Growing Popularity as a Hedge
Bitcoin's advantages over USD include being more durable, digital, decentralized, censorship-resistant, and universal. It also has the potential to be a good store of value like gold. However, USD still has the overwhelming network effect and broad acceptance. Recent events around the world have shaken people's confidence in government-backed currencies, leading to a growing interest in Bitcoin as a hedge. Bitcoin's history includes a pivotal moment in 2013 during the Cyprus banking crisis when people saw the value of holding a decentralized and fungible currency. The right comparison for Bitcoin may be gold and most institutions view it as a complement to, rather than a substitute for, USD and other assets.
Bitcoin's Role in Internet Payments and Value Transfer
Bitcoin was created to replace the payments layer on the internet but it's not great at that. It exists in a different level of the stack. The Bitcoin Blockchain as it exists today is going to be moving large amounts of secure value around infrequently. What needs to be built is still sort of like Bitcoins credit card. Bitcoin is like a bank, it's like the central bank plus your bank. It's not going to be good as a credit card and that's okay because other internet native systems can be the credit card on top of it. As long as you can port in and out, it's totally fine. Bitcoin is one of the first times that we deliberately want to and have done something that is computationally extremely inefficient but if it really does unlock new value for humanity, it's a clever way to take advantage of the orders of magnitude, more compute power that we have now to do something that is potentially a fundamental breakthrough.
The Importance of Network Effect in Business and Startup Growth.
When pursuing a network effect, what matters is getting nodes and usage on the network to start, less what they are doing, and more that people come on board. This applies to businesses like Facebook and Airbnb, where the early days were vastly different from what they are today, but the focus was on growing the network. A similar approach can be used when starting a startup; ladder up from simple ideas to a broader network. Crypto projects have the ability to incentivize usage and reward value within the system itself, making it easier to finance growth without taking on debt or dilution. Capchase is a tool that helps fast-growing SaaS companies finance their growth without taking on debt or dilution, by turning predictable revenue into growth capital.
Capchase raises funds as environmental concerns around cryptocurrency continue
Capchase raised $60 million credit facility to help more SaaS companies extend their runway and reduce dilution. There are environmental concerns regarding the energy consumption of Bitcoin and other cryptocurrencies, with estimates suggesting they produce as much CO2 as a whole city per year. The use of renewable energy in mining facilities does not necessarily negate its impact on greenhouse emissions, and we must consider whether the utility of these new monetary systems is worth the potential consequences of raising global temperatures. There are also political ramifications, as separating currencies from governments may have significant consequences for societal stability. Overall, while there are benefits to these new systems, we must also carefully consider their downsides and answer difficult philosophical questions.
Bitcoin as a Venture Investment Opportunity and Stimulus for Innovation
Bitcoin has been the best venture investment opportunity available to the public, with asymmetric upside, unlike any other public company. Although it has not yet fulfilled its original purpose as a native internet currency medium of transaction, it has stimulated innovation in the area. Investing in Bitcoin is highly volatile and depends on your timeframe. The government provides value in our lives by ensuring stability, but with stability comes sameness. As the government owns less of society's core components, there will be destabilization, better for the oppressed to be un-oppressed, and greater opportunity.
Bitcoin as an Investment: A Look at Its Potential Growth.
Bitcoin can be a good store of value from an investment perspective and provides a hedge against cash inflation. Its volatility is high relative to gold, but it also offers significant upside potential that may be worth building into a portfolio. The venture investment lens shows there is still considerable upside in the investment. Bitcoin has already gone through the science project, seed investment and series A, and B phases, and is now in the growth round phase, with potential for even more growth in the future. Investing in Bitcoin is akin to investing in a growth stage company like Stripe, with the potential for an even larger TAM and future IPO.
Gold's Potential: Beyond a Store of Value
The discussion about the potential of gold and its expansion beyond being just a store of value provides insight on the possible future of the industry. There are two tiers of upside left for gold. One is to realize the gold thesis and the other is to expand beyond gold. The idea is that gold might move beyond just being a store of value and become more like a reserve currency in the future. While this may seem like a low likelihood, taking cues from Amazon's evolution from a bookseller to its current state, it is not impossible. This discussion also shows the value of keeping an open mind about future possibilities and exploring them further.