What is Bitcoin?
We talk about the two actors in Bitcoin: Nodes and Miners and what t are the 2 rolls miners perform.
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well, Hi Alex. How are you doing today?Alexandre Fuchs:
how you doing? I'm doing good. Well welcome everybody. This is episode number five. And today we're gonna dive in and we're gonna talk about Bitcoin.Gabriel Riesco:
So the first question for you, Alex, is, what's Bitcoin?Alexandre Fuchs:
Let's try to summarize a couple of things I think we've gone through in the past episode, I think it's useful to leave that foundation for this one, right? So Bitcoin is a protocol, and also a guest crypto assets if you don't want to call it cryptocurrency. Basically, what it is, it's nice of code that was written around 2008 that is made to be installed on machines all over the world, but you can run essentially Bitcoin on two machines, three machines or a single machine. The buy now is on millions of machine everywhere. And the idea is that it benefits from cryptography and blockchain both are essential technologies in order to create a transactional mechanism that allows you to move around and hold a wall in wallets and be able to transact in the currency, which is Bitcoin, and every Bitcoin itself is 100 million satoshis, which which are used in order to have a smaller unit of accounts than than than Bitcoin, certainly, if Bitcoin ever becomes successful, but at the core, going back to the definition, it's just a piece of software that's running on a bunch of different machines into the machines essentially replicate or communicate with each other. There are two types of sit oversimplify the two types of actors on the blockchain network, there are nodes, which are basically passively keeping a copy of all the transactions, think of it as a ledger, or think of it as a, you know, in accounting, they call in key accounts, but basically kind of debit and credit, journal entries, and all the info. And basically, they store perpetually securely where the crypto comes in, and publicly, transactions between one wallets and another wall. The second type of actors on the network are miners. And these miners have essentially two roles. But basically, what they do is they verify the transactions to make sure that only good transactions are entered into the permanent record of blockchain that gets photocopied all around the network. And they also have the role of creating new bitcoins, who the fact that they get rewarded for doing their work. So if they approve transactions, and those transactions show up in the blockchain as being valid, and there's a whole system for everybody to check each other's work and to make sure that he told them validly if all this goes correctly, there's a certain reward for each block that goes to the miners. And this is why you see very large mining pools and we've seen, particularly as the price of and we'll get to that later. But that's the price of bitcoin goes up, it is easier and easier to transform. You know, if, and I'll talk about difficulty in a second. But the idea is with higher prices of Bitcoin, it becomes more profitable to mine, everything is staying the same, because these reward are more enticing. So we'll get through all the ESG and environmentally friendliness or the energy being used in 2021 in medical and that basically, you can hook up 10 years ago, you could have hooked up a laptop and mined some coins, because they were not very many people doing it. And now you need kind of an army of very sophisticated, proprietary, proprietary developed machines in order to be effective. The last piece dimension which I think is worthwhile is the concept of difficulty, which isn't the network is intelligent enough to look around to see how many people want to be mining Bitcoin. And as a result, what it does is I did address the difficulty in order to make sure that people have to work harder and harder as the demand for the mining operations or do you want looked at it the other way the supply of mining capacity is provided to the network, instead of the price adjusting the prices of Bitcoin at a certain amount of bitcoins is always distributed. What happens is that there's a difficulty which is the amount of work that you have to do in order to earn it. So to summarize, and we'll get into each of the one of these small pieces. The core new concept here is that in order to participate in a A value system or transactional system, all you need is a fairly easy to get computer system. This is on a node side, but even initially on the minor side, so it had a great attractiveness as being a completely decentralized way of accounting for transactions between private entities. Again, that is good.Gabriel Riesco:
Yeah, that seems like a like a pretty long answer. I've heard many times Bitcoin described as digital money or digital a digital currency, if you will have to, if I asked you to describe Bitcoin, in like a short, like one or two sentences, well, how will you do that? Do you agree it's digital, like digital money or digital currency, or it could be used, like, like,Alexandre Fuchs:
well, you got to add a couple of different things, you got to add the centralization. And you have to add that it's a different unit of account. So we'll get to it. For example, most of the money, if you have money, most of the dollars, most of the euros are in digital form. rapidly, none of it is in physical form, right. So whether it's a bank transfer, whether it's an entry in Federal Reserve, or other central bank, account set of accounts, these are also digital currencies or, or assets. What's different here is the transparency, which is you do not have access to the ledger to the transactions that happen either at your bank or at the federal system or any of the systems and powering sending money back and forth, you cannot access it yourself on the outside, which is a major different than Bitcoin, Bitcoin, all the transactions are public, the addresses of the wallets, the sender and the receiver of individual transactions are not necessarily known, and most of them are private. But you can actually see the money flowing. So for example, if you're sending a wire to somebody, you want to send $1,000 to someone, if you send it from a traditional system, it's a trust system, which has all of these individual nodes that you trust and cost your money, the bankruptcy of a bank, and you receive across their bank by telling them that the money arrived in a Bitcoin system or any kind of blockchain system, which is transparent. And for the public, there is no trust, but I can call you and say I just sent you the money. Here's the link, you can see it, you can verify it, essentially, it's all done.Gabriel Riesco:
So yeah, those are the differences. But going back to the question, you don't think that Bitcoin is a digital money?Alexandre Fuchs:
No, it is, but I don't think it's undefined. I think it's it's, you know, Mercedes of the car, just like a, you know, 16 year old leather is a car as well. I think if somebody tells you what a Mercedes is the you're trying to convey,Gabriel Riesco:
okay, yeah, we can we'll we'll Yeah, we'll talk about the differences. But, you know, a car is a car and digital money is digital money. So we'll get into the details of the peculiarities of beeping ifAlexandre Fuchs:
you want to if you want a short answer, in my mind, Bitcoin is two things. protocol, and it's an asset.Gabriel Riesco:
It's a protocol and it's an asset. Can you can use define, like, acid as as a digital asset, if you want to? Yeah, digital asset if you want. Okay. I've heard this question before, I am curious to see what your answer is. What's a Bitcoin? Like what one bitcoin?Alexandre Fuchs:
So the way to think about it is that one bitcoin is 111 millionth of the total possible supply of the unit of account of the Bitcoin protocol. So again, there's a bunch of there's better software running out there that is defining a particular network. That's the big Bitcoin network, right? We think of it exactly like, you know, any other network, right? Netflix having a certain number of movies on its library, or, and, you know, or Spotify having a number of songs, or whatever it is. But basically, Bitcoin is a network that allows you to track when you 1 million entities at its maximum, currently is about 18 and a half, it has another 120 years to go until it gets to 21 million. But basically, most of it is already out there. So let's just say in 2021, is about 18 and a half million bitcoins out there. The thing which is important there is that one bitcoin, by definition is one 8 million and a half million of everything which is available on that network in terms of individual crypto assets or digital assets, right. And as a result, you have the certainty if you believe in the network, and we believe in the cryptography if you believe in all of the different systems that are meant to secure the Bitcoin protocol, you can believe that No one is going to go out and seal or hack or take away or impound or whatever that particular slice of that particular pizza pie, right? That Bitcoin that you own. And we can get into somebody putting a gun to your head and stealing your private keys or you using an exchange, I get hacked or many other ways in which people have lost Bitcoin. But at the protocol level, there has not been a breach there has not been an attack, there has not been a system that has in 13 years, stolen or mis allocated any of the bitcoins or fracking of Bitcoin that exists on the network, another pretty powerful statement, you cannot say that about the US dollar, euro, gold or anything else. All of these have laws in and more importantly, require trust in the central system more or less bold, less, that still is a very heavy and you have to you can remove it around the back and by yourself, get somebody else. And as a result of that, it is is quite powerful as a concept.Gabriel Riesco:
So what's Bitcoin used for? Why is it useful?Alexandre Fuchs:
So Bitcoin is Bitcoin is used by enthusiasts and believers and people. Okay, so this is a very good question, right? I think the best way to think about it is there was a time when people use the grains of rice or whatever, as a method of accounts, in their transaction in the Middle Ages, or before that or more in any other way, right? The there must have been a time where somebody said, Hey, you know, what, gold or gold or some other way is easier for us to use, right. So if you go back to Mesopotamia, there was the whole sense of the scribes sitting down with tablets and putting trades into clay in order to account for transactions between people or kind of good stuff. And over time, all the way to the US dollar, there's been a number of different ways in which these things have changed. Now, most of the time, a government comes in, particularly the government of the place you're living in, and imposes on you some kind of chain, right, the old prank became the new branch of the city between the Euro, I mean, we've lived in some of our lives. But even before that, the one particular method of currency gets replaced by another. It's quite true that at the very beginning, these were probably private methods or methods that were employed by few people in neighboring villages in order to exchange you know, kind of value between each other, it's a little bit like the cow being given as a dowry, and some of these things right, which is value being transferred from private party, the private party, based upon the private parties view what the value is, right. And now, the system we were born in back, we talked about it a couple episodes ago, is a system where we trust the government to be organizing the money for us, so we don't have to think about it. And what Bitcoin becomes, is that it becomes the first modern technology driven, I would say, first broadly adopted or close to being adopted, or certainly there's a lot of enthusiasm around it, where people are voluntarily using it, or a bunch of different uses, and for now, mostly store of value, and some transaction and other kind of settlement layer. utility. But the key point here is that the protocol and the software allowed a game a system is easy to be in all good sense of the word, nothing nefarious, to be created, where as the people join the network and decide, you know, what I am going to play on this network, I'm going to be a node, I'm going to be a miner, I'm going to be a holder, I'm going to have a wallet, I'm going to foam pieces these cryptocurrencies, they now are relying on other people's perception of the value of the one in 18 and a half million units that you have there. So when critics say that I'm getting off topic, but when critics say that it is you know, it's not based on anything, and it is only worth, you know, kind of people's perception of it. It's probably true, but compared to tulips or onions or many other things in the past that have been phrases and have been excessive. It is, at least for the next 120 years, a game and a set of rules that You need to be well protected, secure, predictable. And that's a really powerful contrast to some of the existing more established centralized assets or currency.Gabriel Riesco:
All right, um, we've talked about and we'll come back to these. How the blockchain that Bitcoin is using a blockchain technology. And in regarding to this point, we've talked about this blockchain technology or in this case, Bitcoin in three different aspects, one being Bitcoin as a form of money, digital money, another as having like a transactional value or use value, and another one as Bitcoin as a store of value, as you just stated, now, can you talk us about first of all Bitcoin as a form of digital money?Alexandre Fuchs:
Yes. So. And, again, I think the the fear of trying to pretend to be an expert at this is rattle me, but there are multiple rules of money. And Bitcoin can directly when directly handle most of them. So the first thing is, and it's very good at one possibly, it's not very good at the second, and it's not very good at the third. Yes. And the big point about this is yet what good who all right, when a store of value. So certainly anybody who's put any money in Bitcoin, over the last 10 years has made a fortune if they were to sell, and we can get into all that logic, but it's a store value, it's been speculated asset has been whatever it does, let's put that aside. Because a lot of the frenzy in 90% of the discussion is a lot that has been going on tomorrow or last week or next hour, or whatever it is. And that's a lot of noise and a lot of nonsense. That can Yeah, Is that good?Gabriel Riesco:
Yeah, that that makes sense. Where my understanding, yeah, anyway, letAlexandre Fuchs:
me let me try to finish with the other two, I think it'll explain. The second point is transaction, which is being able to buy goods or services or exchange money for something else in real life, or intellectual property or property rights or something like that, which is buying things with it. And that is probably a little bit more advanced, but not yet completely advanced. So their experiences in El Salvador and other places where they're trying to get people to use it. But in order for that to happen, and for the volume to be handled, you need essentially a lot of things to be built on top of Bitcoin, and Bitcoin becomes essentially a settlement layer. So to make that one relatively easy to understand, the Bitcoin protocol does not allow for as many credit card transactions as they are in the US. So Bitcoin itself can never power all of the payments. For example, in replace all the credit cards in the United States, in we need something else we'll get into what lightning is, and some of the other off Chain Solutions for Bitcoin to do that, but as a transactional currency, it is still very early. And third one is a unit of accounts. And as a unit of account, it's probably the most underdeveloped because nobody prices something in the number of Bitcoin, you don't see a lot of houses priced out in XYZ Bitcoin or shampoo or hairdressers, right. And that is, you know, very early. So even if you were to solve number two, which is to try to get a lot of volume onto the blockchain, or lightning or side chains or somewhere else, you still need a paradigm shift, they're really changing people's behavior where they would start thinking in terms of Bitcoin for prices. And this is also where the Satoshi comes in, because again, one bitcoin equals 100 million satoshis. And therefore, in the long run, the idea is that the units that you're going to use to price your milk or price certain things is going to be Satoshi, not Bitcoin, because Bitcoin will be at that particular level and attainable in terms of value. And the argument on the last one is, and let me just quite a clarify is make that point before we move on, as a unit of pricing, it is certainly not being used right now. So again, you're not buying houses in Bitcoin. But what's fascinating is that the current method, which is the US dollar, or the Euro, or whatever the traditional currency is, is living through a really, you know, powerful moment of inflation or inflation of prices, meaning that if you buy something in 1000, you know, $300 last year, it's probably $350. Now, and so therefore, they are starting to be and they It always has been a little bit of a creep, but there's going to be a lot of uncertainty as to how to how to look at the role of the dollar, and euros and pounds and instead of currencies as a method of unit of accounts, because in that way, a lot of elements are now having to get repriced constantly because of the inflation that you're seeing in the marketplace.Gabriel Riesco:
So just to, to make it a little more clear, when you say unit of account, I think one of the biggest problems of Bitcoin right now as, as a unit of account is the volatility. Is that right?Alexandre Fuchs:
Is the volatility Indeed, indeed, so one of the biggest problem that we, you know, that Bitcoin has is that it's either worth zero, which we're probably more than, you know, $42,000 Bitcoin, right? In like anything, you know, that has a long tail, or has a uncertainty or anything, it is quite difficult to go out and try to figure out what the actual price of that today is right? Like, okay, we have many methods for.Gabriel Riesco:
So yeah, that's a problem that Bitcoin currently has. But if we think of Bitcoin, still as a form of money, which is basically what it's used for, or intended to use for, it's not like, we'll talk about aetherium, or other protocols that could be used for other things, but my understanding of Bitcoin is basically to try or the vision is to use it as a form of money. The things that are good about Bitcoin to my understanding, are one is that it's, there's credible scarcity. Could you talk about that?Alexandre Fuchs:
Well, excuse me, it goes back to the point I was trying to make earlier, which is that there's only a protocol as it is written, and it's quite difficult to change, there's only eating the half of whatever. So it's a little bit like if the whole economy ran on Picasso paintings or Picasso drawings, right. And there was only 18 and a half million because of drawings. And that's it he's done is that you can't falsify them, because in that particular respect with Bitcoin, it is extremely difficult to falsify. And therefore everybody is now deciding, hey, you know, what we're going to use? Because handwritten notes, and sketches as currency all all across all across the world, that scarcity within weird, right, because anybody who thinks of computers thinks of everything as not being scarce, and there's a whole discussion on on non fungible tokens and entities and or an art and so on, so forth, which we can have at some different points. But what is weird is that Bitcoin uses computer technology and uses code to create something which is essentially unique. And or if not unique, though, of which there's only a limited amount, and that amount cannot change it again.Gabriel Riesco:
What does that amount again,Alexandre Fuchs:
so there's currently 18 and a half million printed or mentors, if you want, that's currentlyGabriel Riesco:
reminds currently,Alexandre Fuchs:
and over the next 120 years, it'll go up to 21 million, which is the maximum,Gabriel Riesco:
and that's the maximum. That's it correct.Alexandre Fuchs:
And in terms of not going to, it's not going to change in any uncertain way. Everybody knows me, you know, within a day, how many bitcoins there will be for the next 20 years.Gabriel Riesco:
And that's what makes it scar scars, like the scar city comes from that, yeah.Alexandre Fuchs:
Maybe a better way of thinking about it is predictable. I mean, you know, like when you have something which is 18 million of which this maybe it's difficult to argue that it's scarce, so move that along, but it is absolutely completely predictable, which is not something you can say about pretty much anything else.Gabriel Riesco:
Okay. The other point that is good about Bitcoin in, in, in my opinion, or in the research that I've done on myself, is that it's a that you can make payments like permissionless when you decide to without a third party interfering, so in that sense of transactional value, can you expand or do you agree on that? Yeah.Alexandre Fuchs:
Yeah, we talked about before a little bit. He gets a little bit complicated. And the way I would say it, is that, okay, I'm better handle woundings. Every day, and I think I've talked to you about that before. Every day Bank of America and JP Morgan process, credit card transactions for their retail customers, in establishments with companies that have let's say a bank account at the JP Morgan and bank of america forever. De there is a bank of america retail customer buys, you know, a $5 coffee from a coffee shop or from a natural, natural chain for $5. In that $5 gets credited in the accounts of that company at Bank of America, or bank of america retail customer to jpmorgan chase the company, and vice versa. Right? What happens right now is that they run all this during the day, this could be billion different backgrounds, massive amounts of transactions, obviously, very small transaction, people buying gas in the stock, automatic payments, whatever it is, you're paying your monthly electric bill. And so there's money moving around between different places, right, and they're all denominated in dollars. That absolutely makes sense. But what happens is that JP Morgan, and chase never send each other the corresponding exact amount of what we're spending, right? The way to think about it is like, let's say that you have $10 billion of chase customers buying things at Jitta at Bank of America companies. And then you have let's say $11 billion done by Bank of America, retail customers at JPMorgan Chase company, who rolled accounts at JP Morgan Chase, they don't sell send one way $11 billion, and then send back then billion on the other way, what they do is periodically, they do netting, they basically have a settlement layer, which is where they actually move money between each other. And that amount, they only send a billion dollars back and forth. They actually have accounting systems and all kinds of system that go out and tell them okay, between the two of us and everything, because again, Bank of America is just paying the bill for you at Starbucks when you use your card. And same for JPMorgan Chase is paying the bill for you, right? So this is all if you want digital money, paper money, or digital money, make money, more or less, that gets accounted for very carefully. But there's never the right the same amount of money moving between people than there is of economic activity.Gabriel Riesco:
So what's How is Bitcoin different to that?Alexandre Fuchs:
Well, no, my point is that the point being that the systems that allow for the netting the the system that allow for people to JPMorgan Chase and Bank of America at the end of the day to decide who owes what to each other and get to be built on Bitcoin, right? They don't exist, right? If you try to use Bitcoin to power every transaction, the protocol cannot handle it. It is not big enough, it cannot write to the blockchain once again, remember the blockchain is the whole point about this, remember, is in the software, everybody has a node meaning everybody on the network holds a full copy of the full blockchain. Right? There are other things like charting and other things that we can get into later. But to simplify the whole I, if I have a node in my house, I have every transaction on the Bitcoin since Bitcoin started, right. And so it will be materially impossible for me to do so if I was accounting for every time that you go and buy coffee and all 360 million people in the United States plus plus plot to plot the plot of napkins. All right. So we're very early. And what Bitcoin is trying to prove right now is a very simple thing, it is only trying to prove that it can be a good settlement layer, meaning if JP Morgan Chase and bank of america agree, likely agree to the US dollar, they agree that Bitcoin has value, and they want to be able to exchange Bitcoin to settle all of these transactions. That's already a tremendous value for Bitcoin. Now, later on, you can build all kinds of systems in order to get your transactions to be processed through lightning network and other chains and all that kind of stuff, in order to get to the billions of transactions. But at the very core of the system of any financial system, and this is what gold used to be, when the gold was backing the fiat money, right? The Viet money was just a measurement method of exchange. But everybody said like I want convert ability in gold, because I believe that gold has value I don't believe in your paper. And eventually that went away and everybody believed in just a paper fine. But what Bitcoin is trying to do right now of the three things I talked about is just basically kind of a relatively we'll use store of value, and it will build the transactional piece of it and it will build the unit of account piece over time. So that makes sense.Gabriel Riesco:
Yes, I have I want to dig in more in the transactional value of Bitcoin to my understanding. The way I see is there's two different ways you can turn to transactions with Bitcoin. One is more kind of thinking like a wire transfer. If you Want to transfer a big amount of money? You can do that through the blockchain through Bitcoin and it takes? I'm not sure how much time I believe it's up to one hour. And this the other way of transaction, which is for maybe you want to buy a coffee? WhichUnknown:
so I think,Gabriel Riesco:
and yeah, but I differentiate between those two kinds of transactions. And it seems that Bitcoin can do the bigger transaction if you're willing to wait up to like an hour, but it's still and we'll talk about the lightning network, where they're building up a layer two or another layer on top of the blockchain to be able to do smaller transactions where you can actually buy a coffee. Is that correct? Or do you have any saying? Yeah,Alexandre Fuchs:
I mean, I would simplify it, I would simplify it to say that currently, Bitcoin is a possible store of value, certainly, a lot of people believe it. Number two, large transaction, it is an adequate transactional mechanism for small transaction, it is not. And it pretty much is a complete failure so far yet, as a unit of as a unit of currency measure a measure? That's as much as I can say, but my point is that, that's good. That's fine. Right? I mean, like, if everybody is going to test, any kind of assets, any kind of any kind of projects, anything at all, if you judge the three months, the first two weeks of production on a movie, the whole movie, based upon the very first piece of what you do or anything, it doesn't work, right. The question is, are there virtual cycles, virtuous cycles, that are possibly going to make this stronger and stronger. And that's the base. Right, right. Now, if you try to say, Is this a full fledged currency that anybody can use anywhere anywhere during the world, then sure the answer's no. But you know, so is the Indian rupee or anything, if I'm living here, I'm not using, you know, the Vietnamese Dong. For settlements, right. Bitcoin has found a certain community a certain usage, it is not universal yet. Is it on its way to becoming universal? That's a very interesting question. I think that's one that we can discuss. But yet, it is not a good unit of measure is not a good transactional mechanism for small things, yet, but it is very possible to define a path to all these things. Or it's worth discussing us. But though,Gabriel Riesco:
okay, digging in a little more of a store of value Bitcoin as a store of value. I hear a lot that some people use it as a hedge against inflation, the way I see these I see dangerous if you do hedges against inflation against the dollar, or the pound are a strong currency, in short term because of the volatility, but it could possibly or throughout its history as a store of value and long term it, it seems that it could be a hedge against inflation. What's your view on that?Alexandre Fuchs:
That's an interesting point. Right? I mean, that's it to me, I think that in the extreme, if inflation gets extremely bad, then yeah, I think some portion of the population some portion of the institution will lose interest in being interior intermediated between them and their money or their value. And Bitcoin would have a role in moderate inflation and no inflation and balanced budgets, systems and, you know, more real interest rate environments, none of which we're seeing now. But could you know, could there be an outcome here? It's, it's possibly that it fails and its usefulness as an inflation hedge as one of its multiple useful use of time. does not happen, right.Gabriel Riesco:
Is that more on a long term terms or are short term terms? Well,Alexandre Fuchs:
think about something that you could have bought 40 years ago, right, and you had a chance to buy anything 40 years ago. What are the things that have gone up in value real estate, gold a little bit, I guess stocks Certainly, you know, a stock, right, and then we get into the securities thing, you know, like a stock, what's the difference with that right then in the stock market will mix in some private, you know, private organization that is fighting to try to have some kind of relevance to its products. All of which I think next or if not all, wait, I think that makes a lot of sense. And those are gone up enormously, because the optimal company finds a way to navigate all of this, you know, inflation products, technology curves, consumer changes, all this kind of stuff, and, you know, many of them come out ahead or find a way to survive and to pregnant. In the process, right, I don't know that you would have made, you know, tons of money, holding, you know, consumption. goods, right. So buying a table, buying a book, anything, you know, buying electricity buying a car, except for very rare examples, there's not a lot of things that protect your wealth, right. So, and there are a lot of people whose job it is either for themselves or for others, quite a find ways to protect your wealth, right. And, you know, this is interesting, this is, you know, what this is, it's a system that private people can go out and measure and transact and exchange wealth between each other. Now, the government is always going to want to get paid and have taxes and KYC know, your customer and other anti money laundering issues, that are parasitic, I don't think they're core to the issue. I don't think that you ban a whole industry, because, you know, I just want to get to Africa and possibly political. But ultimately, this is a piece of software that allows you if you believe in us to transact value with somebody else, so anybody who doesn't adopt the network, right, so think of it this webinar, I think of the value of the cell phone network, you can be part of it or reject being part of it, right? If you are part of it, you have a number of different usages, you have to pay a certain amount, but it brings you some kind of value and everybody pretty much as a smartphone and has decided that they get value out of it, and sort of the price has gone down in order to maximize the market and all that kind of stuff. So it is quite different in certain parameters than Bitcoin is. But ultimately, what makes the cell phone network valuable is the network effects of the fact that people adopt it that you can call your mother that you can call your friends, you can text people, they're always available. There was a time where if you wanted to reach someone, you would call them either message us on an answering machine or some landline somewhere, all that is gone. Because now you have the ability to choose whether or not you want to receive messages from somebody instantly or not quite there. And neither is really only due to the network being built. People are adopting in deciding how to use a use for it with all the people around providing it's making you pay for it, and so on so forth, oh, bitcoins kind of the same, right? If you if for people using Bitcoin to transact money between themselves, it's not very successful, but it's probably useful to the four of them, right? If they all believe in it, right? But if more and more people use it, and more and more people are willing to pay $42,000 for a single Bitcoin, and you can go now take a Bitcoin and sell it for that and get the hard cash dollars perhaps. And, you know, that starts becoming interesting to people. And then, you know, the key, the key thing here, right, is this is speculative, you know, this is new, this is the very beginning, but it was like 1994, looking at Netscape and telling yourself, what's the internet going to do? We could do a bunch of different things, we're going to be uncertain, there's a lot of things that that could happen, right. But as a speculative assets, the question then becomes, can you afford not to have not to have even if you're, if your job is to protect your wealth, or to grow into the blitzers data protected? If you're really a good arguments, not have a 1% position of your wealth in it, or to have some kind of exposure to it. This is the argument to be made for years for gold, as the argument has been made for us with commodities, you know, for people who don't understand any of these markets, and you know, somebody parks a certain amount, because it turns out that over time that someday I can see that argument being made very easily.Gabriel Riesco:
So, to that point, you you mentioned the network effect, and it seems like Bitcoin with a network effect has been expanding considerably. Going back to the question that used as a hedge against inflation, that network effect how how relevant it is. In regards to inflation, well, inflationAlexandre Fuchs:
let's look at both sides, right? If you are trying to invest in save, then your unit of account is beaten by inflation. So if you had $10,000.10 years ago, and you have $10,000, now in baijiu, right, just make it super simple, right? So if you think of it that retirees need to retire and more money every year from their retirements, and income from their retirements that they are able to get from the new way that you know, the meaning is that second, you bet on the saving side. And that creates all kinds of problems. Because, you know, people were the years putting money aside, but again, at a bank earning a certain decent rate of return on it was somewhat risk free up until certain protections. And as a result of that, they knew what they were going to get there was some strict and do that right. Now, on the other side, for companies, inflation is exactly the opposite in playing the test of how good your product is, if your product is good in inflation environment, oh my god, this is a fantastic opportunity allows you to raise prices, you can get paid more. And and conversely, if your product is not very good, or is undifferentiated, or there's many other people who can do the same job, then your ability to in late your, let's say for example wages, right, so how in workers are generally hurt by inflation, because it's relatively difficult for them to go and argue, you know, as a single employee at McDonald's, that's no, they should be getting paid $1 more an hour, because there's a policy and now the company has to figure out what is going to pay everyone right, in a stable environment where they just made the money that they make, there's no inflation, they can invest their savings or pay for housing at a reasonable rate, and so on, so forth, and all this in equilibrium. But then the other equilibrium that comes in with inflation, that the runaway inflation, I mean, not without talking about Argentina, or, or the Weimar Republic, but you know, with meaningful inflation, let's say, three, four or 5% a year, then it's all a question of who can raise the prices. Right? If you can raise your prices, you're gonna make more money in inflationary environment. So don't be surprised if the Apple iPhone or any of these things that everybody wants for Netflix, or any of the things that are now, you know, probably a little bit under priced, or the streaming services in an introductory phase, not for the majority columns, majority Democrats. But you know, a new Apple phone now is, you know, all loaded up at 100 bucks or 15 or above. That's insane, right? But if not insane in terms of value to you, because now they've convinced you to pay monthly to have some kind of way where you can tell usually it's only $2 a day. So they've figured out all the ways in which either utility fantastic companies need to be profitable. So in that context, what is Bitcoin? Well, it's tough to say, right? If if there's tons of runaway inflation, inflation goes crazy, but there's no network effects, meaning that nobody uses Bitcoin and it comes out of favor or that it's been banned by all governments around the world or whatever it is, it makes it difficult for it to be broadly adopted in the quantum field. But there is a very strong argument, the whole discussion happening right now on trivial in Washington, DC and a number of us partisan, bipartisan group of senators are battling it out and trying to define what they want to try to oppose legislative when it comes to crypto, which is fascinating. And I think we were difficult, typical washington dc non review, polemical process. But right now, there's a there's a whole arguments of what the government should do in order to read or regulate or clean up or ban or, or or, you know, these and I think there's a very strong argument to be made with Cynthia Loomis, the Senator from Wyoming and other people have made the very strong argument that, you know, historically, the people who have been promoting technology not getting in the way just trying to clean up the edge cases, criminality, problems, other things like that. But basically, it's coming after the fact that the markets and and trying to make sure to let him grow and then clean it up as opposed to legislated and regulated from the start. That that has worked really well for the United States. in building the number of protocols we're trying to use, and have created domination for the companies, it has attracted some of the best enterpreneurs to meet with us those on Bitcoin and cryptocurrencies may be very interesting. Because it'll define it, there are people who say that all this is inevitable. And there's a good reason that, logically, if you add software to money, you should be able to have something which is more efficient in your symptoms. So that inefficiency, currently, we're you know, 3%, Visa, MasterCard, ease, and, you know, all the fees that you end up, you know, in grand grand branches where nobody knows anything that are on payroll, basically pay for as a user, large, you know, financial center banks. Is there another more efficient protocol, a better protocol? I think I come out on Yes. But, you know, we could go into a 20 year, Middle Ages moment where everybody tries to regulate it and kills it early, whether it survives or not, you know, Bitcoin itself or something else, it gets invented? I don't know. You know, soGabriel Riesco:
you think that using Bitcoin as a hedge against inflation is purely speculative? You have to be careful?Alexandre Fuchs:
Well, I would venture to say that it's not stupid speculation. Right. So some people get incredibly allergic to the word speculation. And I think that some people convince themselves of the security of things that are completely speculative.Gabriel Riesco:
Okay, so let me interrupt you there. That brings me to the next point, I think we're very related to this, using Bitcoin as an investment, I think it's worth talking about when you're talking about speculation, talking about the risk, reward or symmetry. Can you talk about that?Alexandre Fuchs:
Okay. Not willingly. But it's very difficult to, to make an argument on that one, for example, the asymmetry of buying Bitcoin into them 21, according to they, are you risking things on risking things? particular and none of this is financial advice, it's just going to think through what is truly kind of a black swan event, right? This has fun, say that's 50% chance of being zero and 50%, generally much, much more than $42,000. Right. So like anything in, you know, what they call risk management, or portfolio sizing, or whatever it is, then you need to decide what your appetite for risk is, right? Now, there are people who put their whole net worth and burn money and so forth to go to go all into bitcoin. And, you know, congratulations, you know, that people died on John's Island and in other places. I mean, this is, you know, that, yeah, it is wonderful to be convinced of something. So much so, fantastic rate. My point is a different one, I don't think it's a binary choice, like anything, and I think investment, this may be one of the things that comes up over and over on this podcast and, and in, in our thinking of investing is that I don't need to be either Manichaean, I don't need to be black and white on every one of these issues. I can I can, I can take an educated bit and educated speculative position. And tell myself this is going to be interesting. Because on top of that, remember that there are traders who know how to trade this stuff, and they know when to buy and sell or do things where they think they do or whatever it is this whole trading of a asset class that, you know, the banks and other people, you know, nobody know how to do. No, I don't know how to do that. It's not mine. But the I go back and say that, even from a defensive point of view, right, that you're looking at an inflationary environment, and you're looking at a bunch of different things. I am not totally convinced that the idea of putting money in Bitcoin as inflation is twice as dumb as putting money into gold. And I think a lot of people automatically put money into gold when they think of inflation and other things like that. And I'm not sure that this is 50% smarter or whatever, than putting it in Bitcoin. Bitcoin makes a fairly strong case that you know, some of the smarter people around believe in it, that's going to have some network effect. You know it, there's a lot of stupidity in and around the topic. So it's not metrics, but the ultimately the kind of work if it is adopted, so you need to just always measure adoption, look at a number of wallets that are created and you can look at number holders that have been grown continuously, you need to see how many more people on a network and back to you know, Metcalfe's law and the other network effects kind of theories. But the idea is, as you add people to network, more people get added to the network. And it's a self fulfilling prophecies that if people see value in network, and they get added to the network and their contacts, their friends, their vendors, their employees, and bosses, everybody else sees them on it can transact with them on it over time, it'll grow enough, does it grow worth this? Or does it explode or do anything? Again, you know, it's it's probably to value something which is practically non valuable, right? I mean, you can't, there's no, there's no real model that you can run on. I mean, I've seen the attempts here and there, they focus on clothes, and they focus on other things. Fantastic. But the best way to think about it, I think, is what is your percentage betting that this will work? Right? And how big you think it is, if it works? And, you know, my sense is, if you think that this has a chance to work, and you were above 5%, or 10%, then it's not stupid to keep an eye on. I don't I completely disagree with the idea that it has to work 100% for me to worry about it. I think that's nonsense. I think that you see a lot of people in the financial institutions, the banks and so forth, are now forced to look into it, because they know better, they've seen this movie play before, something comes in out of nowhere, the status, they may reject it, but they need to understand, so you need to play with it. I think that's where we are, we're in the middle of uncertainty and uncertainty. You know, again, some of the best trades that anybody has done, makes you feel really uncomfortable, and you put the trade on, you're just, I mean, floored. And, and, and you go back and look at it, a couple years later, whatever it is, and you go like, I was like such a genius, and you know, genius in love. It's just, you want to make an assessment. You know, everything that I've seen in the last year has confirmed greater adoption, greater belief in the network. More user more value. Right? Now, it's gone from 4000 to 40,000. I'm not sure there's been 10 times more value or more network users or spawns So now the question is was an undervalued before or was it overvalued? Now, I can tell you these things. Like, we all have to enter the battle map, right? I mean, you know, it's got the 64 in back to 49 out of 42. There's a whole battle happening out there.Gabriel Riesco:
Alright, well, I think that we could wrap it up here. I think that was a very interesting conversation around Bitcoin. And we'll, we'll keep the conversation up on talk more about Bitcoin on on next episodes, we'll, we'll touch on other cryptocurrencies, like aetherium, which is kind of in the eyes of a lot of people right now. Would you like to add anything else? No, IAlexandre Fuchs:
want to thank anybody who's listening to us for being patient and listen to our stuff. You know, this is kind of interesting. And, you know, again, if anybody has any thought or anything that they want us to cover, or disagree with I, there's nothing better than a good argument.Gabriel Riesco:
Well, thank you very much. And thanks for all the listeners. If you value this podcast, please give us a review. In word ever, podcast platform you use. And please visit our Facebook group. And leave us a comment or any questions that you have there. All right, thank you so much, Alex. Have a great day. Thanks, everyone. Thanks, everyone.