Russ Roberts

Gavin Andresen on the Present and Future of Bitcoin

EconTalk Episode with Gavin Andresen
Hosted by Russ Roberts
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Coyle Postmortem... Continuing Conversation... Gav...

Gavin Andresen, Chief Scientist of the Bitcoin Foundation, talks with EconTalk host Russ Roberts about where Bitcoin has been and where it might be headed in the future. Topics discussed include competing cryptocurrencies such as Dogecoin, the role of the Bitcoin Foundation, the challenges Bitcoin faces going forward, and the mystery of Satoshi Nakamoto.

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0:33Intro. [Recording date: April 25, 2014.] Russ: We first talked about Bitcoin, it seems like a very, very long time ago. It's been three years. A lot has changed since then, so I wanted to catch up. Let's start with a review. How does a person get bitcoins and what can you do with them when you have them? Guest: Sure. So to get bitcoins, you need first what's called a bitcoin wallet. So, you need a place to put them. And what that is, is just a piece of software that runs either on your computer, on your cellphone, possibly on somebody else's computer or cellphone, that is a place where the bitcoins can go. So, the bitcoin wallet software connects to the Internet, and runs the bitcoin protocol; which talks to other people running bitcoin wallets and the bitcoin protocol. And then once you are connected to that network, you can participate in that. You can receive the coins from other people; you can send the coins once you have them. The way you get them typically is you trade things for them. Either you trade a produce or service and get paid in bitcoin. Maybe you go to a currency exchange where you trade some dollars or euros or yen that you might happen to have. Or maybe, like me, you trade your labor. So, I am actually paid my salary in bitcoin and get paid to one of my bitcoin wallets my salary every month. So that's the typical way people get bitcoins. Bitcoin is different in that it's a decentralized system. So, there is a second, much more difficult way to get bitcoins; and that is to try to create them. There's no central bank or Federal Reserve that issues bitcoins. Instead, anybody can, again, run some software and connect to the bitcoin payment network, and then, in exchange for doing the work of validating all of the bitcoin transactions that are happening on the network, you can get rewarded with some brand new bitcoins. And that's the way all bitcoins come into existence. There are strict rules on how many bitcoins are issued over time. And lots of people all over the world are competing against each other to try to get those bitcoins. And every ten minutes, on average, somebody wins that competition and gets some brand new bitcoins that they can then use to trade for products or services or in exchange for other currencies. Russ: And that limit, as we talked about in our last episode, that limit is what encourages people to be confident that there isn't going to be inflation or exploitation of current bitcoin holders by the central authority. Because there is no central authority; and the algorithm in the software limits the expansion of bitcoins. Correct? Guest: Exactly. So everybody is running the same--well, everybody is running software that adheres to this protocol that's written down. And everybody is validating everybody else's work. So that if you try to break the rules and create more bitcoins than the algorithm says should be created, then basically everybody else just ignores you. And they say: Your bitcoins didn't follow the rules; therefore they are not valid, and I'm not going to give you anything of value for them. The limit put in place was, as far as we know, chosen pretty arbitrarily. So, there's a limit of 21 million bitcoins that will ever be created. Right now we are at, if I recall correctly, somewhere between 12 and 13 million bitcoins have been issued. Russ: And you call that 'issuing'--it's not really the best word, I guess. It's the word we use with regular banks, but it's really a mining process, right? Where people can go out and get them created up to that maximum of 21 million. Guest: Yes. You can think of it as kind of issued by this algorithm that has a fixed schedule for how many bitcoins will be created over time. And that schedule runs out, like 100 years from now as the very last fraction of a bitcoin is created. And actually that's another important thing to point out. When I say 21 million bitcoins, bitcoins are very divisible. So, we talk about fractions of a bitcoin and you can trade in fractions of bitcoins. So, the 21 million limit isn't a problem in practice. We don't run out because we just split them into finer and finer pieces. Russ: Right. In theory as the U.S. dollar continues to be inflated by the Federal Reserve, the central bank, bitcoins would just become more valuable relative to dollars, and their dollar amount would increase. Correct? Guest: Yes, and that has happened over the last three years, quite dramatically. So, I looked at the price on the exchanges when we last talked three years ago was about $0.70. So for $0.70 you could buy one bitcoin. This morning when I checked, the price on the exchanges was about $450. So, we're up about 500 times what we were three years ago. In spite of there being about twice as many bitcoins in circulation today as there were three years ago. Russ: And how many people, how many vendors accept bitcoins now, relative to the recent past? How much expansion has there been in the opportunities to use bitcoins? Guest: That's also really exploded. So there are at least tens of thousands of merchants all over the world accepting bitcoin. And I know that because there are some companies that make it easier for merchants to accept bitcoins for their products and services, and those companies occasionally release press releases boasting, you know, the 10,000th merchant has signed up with their service to accept bitcoins. And that's a huge difference from three years ago where it was really hard to find things to spend your bitcoins on. There were very few people accepting bitcoins. And now, the last few times I've gone anywhere, I've used a website called Gbear[?] that accepts bitcoins to pay for plane flights. The biggest merchant so far to accept bitcoin is probably Overstock.com, which sells all sorts of things. Just about anything. And they happily accept bitcoin and did over a million dollars worth of bitcoin transactions in the first, I think, 40 days that they were accepting them. So, it really has exploded, even in just the past 3, 4, 5 months we've seen a huge increase.
7:47Russ: Let's talk about the trust issue. One element of trust that's relevant is the one we just talked about, which is fear of inflation, being exploited by an arbitrary expansion in the currency. The other is just the vagueness and the novelty of the concept. So, it's a weird thing, of course in every bank. I have a bank account at Schwab, Charles Schwab, and I assume they've got my money. I don't really worry at night that it's going to disappear. Part of that's because of the regulatory environment. But part of it is because of the brand name and a certain set of implicit trust that has evolved because I assume the are not going to destroy their franchise. Where does--when I've got my bitcoin wallet, how do I know it's not going to get emptied out by somebody? Where's the source of trust for those kind of transactions? What's the insurance, either actual or implicit? Guest: I should first say, I tell people not to trust Bitcoin too far. So, I still say that it's an experiment, and the whole thing could implode. When I said that three years ago, I think I was much less certain of Bitcoin's future for a lot of reasons than I am today. There is still a huge problem with keeping your bitcoins safe. My short answer to what is bitcoin, is: It is cash for the Internet. It is very much like cash in that when you have some bitcoins on your computer or your cellphone, you really have them. I mean, they are not being held by somebody else. And so if your computer or cellphone is stolen, if those bitcoins come under somebody else's control, it's a lot like somebody stealing your physical wallet, in that they now have your cash and they can spend it, and there's very little you can do to prevent somebody from spending those bitcoins. So that's a different model from most of the kind of electronic payment systems that we use today. If somebody steals your credit card and runs up some invalid transactions on your credit card, you can dispute those charges with the credit card company; you can probably get that money back. The merchant will be very unhappy because they are out whatever products or services they provided. But for consumers, credit cards are safer, because you don't have to worry so much about what if it gets stolen. We're actually doing a lot of technical work right now to help make it much easier to secure your bitcoins. So, I think in the coming year or two, we'll probably start to see companies that will help you keep your bitcoins much safer, and yet do it in a way that you don't also have to trust the company. So, one of the problems with trusting Schwab or your credit card company is you have to trust them with your money. And sometimes that trust is misplaced. We have seen banks fail; brokerages can fail. Credit card companies can screw up and make your life miserable. So, Bitcoin is a work in progress. We're trying to figure out how to get the best of both worlds--how to both give you control of your money but also allow you enough control that your money is safe. Russ: It's a good idea not to put all of your eggs in one basket. That's one of the lessons of economics: diversification under uncertainty and risk is always a good idea. So, there's obviously, inevitably, some uncertainty. But what it reminds me of, a little bit, is when Amazon first started. I remember it must have been some time in the 1990s--I was having lunch with someone who was a fairly intelligent person, I thought. And he told me that he gave his credit card to this weird Internet company and they sent him books. And I said: How does that work? He said, Well, I just give them my credit card number. You just give it? And he trusted them, again, in some dimension. It's not--that word 'trust' is a very rich concept. But he relied on their incentive to not abuse that trust. And now we do that constantly, all the time. We understand there's some risk involved. The risk is mitigated by the way the credit card companies react and treat us, which has costs, of course. It may not be the best way to do it. But these systems do emerge, that try to make it easier. And I assume that is what will happen with Bitcoin, if it does make it.
12:53Russ: Talk a little bit about the Bitcoin Foundation. Are you it? You said you are paid by the Foundation in bitcoins. Who sets your salary? Who is in charge of the Foundation? If nobody is in charge of Bitcoin, who is in charge of the Foundation? And what role does the Foundation play in the evolution of Bitcoin? Guest: Sure. Yeah. The Bitcoin Foundation is a nonprofit trade association. Basically, it's a 501c6 here in the United States. So it is a bunch of people who are interested in seeing Bitcoin succeed got together and created a nonprofit organization dedicated in helping Bitcoin succeed in however we think it can succeed. So, it is not just me--gee, I don't know how many employees the Foundation has now. But as Bitcoin has had explosive growth, the Foundation has had explosive growth also. So it probably would be up to 6 or 7 or 8 at the Bitcoin Foundation, now. Russ: Enormous. Guest: It is still small. Actually, the Foundation is starting to go international. We have affiliates coming up all over the world and are recruiting more affiliates, so, trying to again scale up as this crazy project scales up. You asked, who sets my salary? Russ: Yeah. Who is in charge? Guest: It's like the traditional company. There's a Board of Directors. I am on the Foundation Board of Directors, although I think I will not run again, so I will not be a member of the Board of Directors by the end of this year. So the Board of Directors sets direction. There's an Executive Director who runs the corporation and who helps set priorities along with the Board. And they set my salary. My salary is actually set in dollars. It's not set in bitcoins. So there's a dollar amount that is converted to bitcoins at the exchange rate beginning at every month. And that has to be done because the bitcoin price is not stable enough to write contracts in. Which is definitely a problem. Russ: Yeah, we'll talk about that. Go ahead. Guest: So, the role of the Foundation really is to help Bitcoin succeed. So, don't think of it as the Foundation controls Bitcoin, but more, you know, the Foundation does things to help Bitcoin be more successful. So, things like paying me a salary to work on Bitcoin full time so that I can help make the software better and think about what are the technical challenges that will be coming up. The last year, the Bitcoin Foundation has actually played a pretty bit role in talking to regulators in Washington, D.C. because one of the issues with a completely decentralized system like Bitcoin is a lot of our legal and regulatory system aren't used to dealing with this--things like Bitcoin or things like the Internet where there is no one clear entity in charge. And so the Foundation has played a really key role in talking to regulators, explaining what Bitcoin is, explaining how you can or can't control it. And doing things like that to try to help Bitcoin more successful. Russ: That actually was going to be my next question, which is: there has been an enormous increase in regulatory interest in Bitcoin in the last few years, as it has become more popular and available and active. You said they don't know what to do with you. But they certainly are going to try and find a way I'm sure to do something. So, two questions: what type of regulatory oversight is in place now, if any? That's number one. And number two: Are you worried about that in the future? And number three: Is there anything they can really do about it, if in fact people want to accept bitcoins and use them freely? Guest: So, here in the--first I should say it varies depending on where you are in the world. So, if we are talking about regulation here in the United States, the Financial Crimes Enforcement Network, FinCEN, has kind of taken the lead on--I think they are one of the earliest regulators of Bitcoin. So they came out and said that if you are exchanging bitcoins for dollars or you are helping people move bitcoins around then you fall under the existing money transmitter licensing requirements. And so there is a process for becoming a money transmitter and all sorts of regulations on--you have to abide by what are known as Know Your Customer and anti-money-laundering regulations. So, you are expected if transactions get above a certain threshold to know who is making those transactions, what they are doing, where the money came from. All of those kinds of things. Essentially, this is all in reaction to terrorist financing and the drug war, to try to make it harder for drug dealers to spend their ill-gotten gains on products and services. That's been the--FinCEN has been the early regulator. For example, recently the IRS (Internal Revenue Service) came out with a ruling on, if you make a profit on bitcoin, how to report that profit on your taxes. I actually was in Washington, D.C. recently talking to the Securities and Exchange Commission, who had a lot of questions about what is Bitcoin and will they have some role in regulating it. So I think you are right--there is a lot of interest. One thing that surprised me, though, is that, I think here in the United States, the regulators seem pretty reasonable. They seem like the do understand there's a lot of innovation possible here, and I think they really are trying to make an effort to balance what they see their job is--which is consumer protection and fighting money laundering versus allowing innovation to happen. So, am I worried? I think I am less worried about the regulators than I am about law-makers. So, we've seen, I think, some Congress people step forward and make some kind of crazy claims about Bitcoin. Russ: Like what? Guest: Well, that it is only good for illicit activity, for example. There was a bit online drug market called the Silk Road that caused a furor among some Congress people, who were very upset about it. Which--I mean, the Silk Road is no longer a business. They were put out of business and the alleged founder of the Silk Road, the 'Dread Pirate Roberts'-- Russ: Not related. I just want to say, not related to me. I want to be transparent here. Guest: Although I think he was in the Bay area. Russ: Ah, but I live in D.C., actually. I just come out to Stanford erratically. No, I'm related to the Dread Pirate Roberts in the Princess Bride book, but not the one in Silk Road. Guest: So, I think my fear would be that Congress people decide that we need a lot of new laws to do something with Bitcoin to try to ban it. And your final question was:-- Russ: Can they? Guest: Could they? And that's a good question. There's a fair bit of debate in the Bitcoin community. I think in the short term they could definitely make it very hard to transact in bitcoin. One thing that we've seen is that bitcoin businesses, some bitcoin businesses, have had a lot of trouble keeping a bank account open, because banks have, for whatever reason--I think fear of regulation, fear of the unknown--have shut down bitcoin businesses' bank accounts. Which can be difficult if you are a business that needs to, you know, trade bitcoins for dollars for whatever reason. I think long term, you could bootstrap beyond that. So, for somebody like me who gets paid a salary in bitcoin and then buys products and services with bitcoin, with this decentralized network there's not a clear kind of place for regulators to get a handle on that activity. Although certainly before my salary gets to me, payroll taxes are taken out and are converted into dollars and are sent to the government. So even there, unless you could imagine some huge kind of underground economy which--I mean, the underground economy is huge-- Russ: Yeah, I can imagine it. Guest: But, you know, I think most businesses, most large businesses anyway, want to comply with regulation. They don't want to pay their employees in cash under the table and they don't, because they are afraid of being caught, reputation being tarnished, being thrown in jail. So that's kind of the debate in the Bitcoin world: Could you get to a Bitcoin world where there is just--ignore the regulators. I fall on the side of I don't think so, at least not at scale. Russ: Yeah, that's the issue. I think you could, perhaps, but not at a scale that would make it interesting. Guest: Right, exactly.
23:53Russ: Let's talk briefly about that IRS ruling. Was that important for you--that bitcoins are property rather than currency for tax purposes? Guest: It's--I think it's about the best we could expect. It would have been nice if the IRS had ruled bitcoin is currency, because the treatment of currency is a little better. If I spend $100 in bitcoin, it's like spending $100 in euro on a European vacation. Excuse me. It would be nice if it was treated like spending $100 in euro while I'm on vacation. For the IRS's purposes, if you spend $100 in euros, you don't need to go back and figure out how many dollars you paid for those euros and did you actually make a profit or a loss. [I think Andresen wants to say here: If you spend €100, you don't need to go back and figure out if you made a profit or a loss in dollar terms.--Econlib Ed.] But they are saying with bitcoin, for every little transaction that you do, it's treated like selling property. And so theoretically you do need to go back and figure out: I bought some things worth $100, but I only paid $50 for those bitcoins, so therefore I owe $50 [=$100-$50 --Econlib Ed.] in capital gains taxes on that purchase. So, it will be annoying. Bitcoin wallet software next year will keep track of that for you, and will make it easy for you to fill out your taxes properly. It also certainly gets to the question of: would the IRS ever know? Russ: Yeah, that was my next question. Guest: Which is a separate question. It will probably be a lot like the Internet and sales taxes. I live in Massachusetts, where I am supposed to pay sales taxes on every single Internet purchase I make, no matter-- Russ: Careful, Gavin. We have a lot of listeners. Guest: Well, I will admit, I have not done that in years past. I have not kept track of every single Internet purchase that I made and paid the Massachusetts sales taxes. And I would guess that any Massachusetts resident that has made more than 3 or 4 Internet transactions would probably be, if they are honest, the same. Russ: This may reduce your chances of becoming Attorney General of the United States, I just want to warn you. Although there is some evidence you are allowed to cheat on your taxes and still become, say, Secretary of Treasury, hypothetically, anyway.
26:15Russ: Let's move on. So, you have had modest success. I don't know how to characterize it. It's been quite dramatic success; but still modest overall. The modest success of Bitcoin over the last few years has spawned some competitors. Is that good or bad for you? What do you think of that environment that you are in now? Guest: Well, it's interesting. I'm a big believer in competition. Bitcoin is open source and nothing stops somebody from taking it, lock, stock, and barrel, and redeploying the core system and starting up their own currency. And hundreds of people have done that. So there are hundreds of what I call 'altcoins.' One of the surprising things to me, one of the things I've learned over the last 3 years, is that there are people who will trade anything if it has a place to trade and has a price. I don't have a kind of Wall Street trading mentality, but I think a lot of these altcoins are really just people kind of taking a flyer. People who are excited about trading them to try to buy low and sell high with no thought of is there any kind of underlying value or does this have any long-term potential. So I think a lot of the altcoins that have been created are just about that. There is also a really interesting phenomenon of kind of a currency as a community. So, there's an interesting altcoin called Dogecoin, which I think is actually the third-largest of these kind of bitcoin wannabes. Which started out as a joke. So, 'doge' is this Internet meme, which is this cute puppy that has kind of broken English, two- and three-word phrases. And the doge meme has been around for awhile. And some people decided to create Dogecoin, kind of as a lark, I understand. And it's a lark that, in the nature of things on the Internet it went viral and took off, and suddenly has tens or hundreds of millions of dollars worth of value. And that's something else which just fascinates me to watch and look at and to see if, will that currency have any lasting value, and if it does, why? Why do people decide to invest in it? Russ: Yeah, that's wild. Although I don't get to hear the word 'doge' very often. I do think of The Court Jester in Danny Kaye where he says 'the doge did what the doge does.' It is a great, great unappreciated movie; and it's a great movie to watch with your children. The Court Jester. But that's Dogecoin. You said they were the third largest. What's the second, the next largest competitor to Bitcoin? Guest: Bitcoin is the largest, and I believe there's a company called Litecoin, which I believe is second largest. And then Dogecoin is third. Last I checked. Russ: How would you know? And how do you know anything about any of these things? We talked earlier about how many bitcoins have been mined and how many are left to go, and how many merchants accept it. There's no government agency tracking this. Are these numbers produced by the Bitcoin Foundation with respect to bitcoin? Or is somebody else gathering that somehow? How do we know? Guest: Well, for Bitcoin, everybody knows how many bitcoins there are because the bitcoin system is a public leger, so every transaction that has ever happened is announced over the Internet, over this payment network. And actually, if you run the reference symbol notation of Bitcoin, it actually spins a long time downloading the entire history of every bitcoin transaction that's ever happened. Including all of what are called the coin-based transactions which create brand new bitcoins. So, you can run some software that will tell you exactly how many bitcoins there are, how many transactions there have been. To get at the price of bitcoin you have to look at the Bitcoin Exchanges, which publish the exchange rate--how many dollars does it cost to buy one bitcoin? And given the number of bitcoins and the price you can calculate an M1 money supply of value. And for Litecoin and Dogecoin, similarly, they are basically clones of Bitcoin, so they also have a public leger where anybody can connect to their networks and download the history of their transactions and see how many litecoins or dogecoins there are. And again, there are exchanges where you can exchange bitcoins for litecoins, bitcoins for dollars, litecoins for dollars--so given those markets you can work out how much economic activity is there and how much is their value overall. Russ: You called them clones I assume because they use the same software, right? Guest: Yeah. Typically, these altcoins take the Bitcoin software and they tweak it a little bit. So, for example, Litecoin I think produces four times as many coins as Bitcoin. Dogecoin produces like 10,000 times as many dogecoins as Bitcoin. And those are tweaks they have made into the coin creation algorithm. Russ: Are there any aesthetics involved? One way you might compete is you give them the prettiest money, right? Things could happen when you look at your wallet--you look at your wallet in a certain way and see pictures of great economists, say, on one of the bills. I don't know. Is there any role for aesthetics in how this works? Guest: Well, I think that is part of Doge. They have that cute puppy as their logo. And that seems to be a large part of their value. And also the way they market their currency--they market it as this fun, easy thing; we're all going to tip each other; we produce lots of money and we give away lots of money. They say that they sponsored the Jamaican bobsled team. They just have kind of this feeling-- Russ: Vibe-- Guest: of [?] and fun. Yes, it's a vibe. Exactly. Russ: Around money. Which is unusual. Guest: It is unusual. It's an odd place for people to kind of invest their mental effort. In my opinion. But, I'm a hard-headed geek who looks at nuts and bolts and doesn't think about, does your money have a picture of a cute puppy on it.
33:28Russ: Paul Krugman has called Bitcoin 'evil.' What's your reaction to that? Guest: I have trouble with people who call technologies 'evil.' I mean, maybe it's because I am a geek. I see technology as being value neutral. What you do with the technology can be good or evil. But technology is what it is. It would be like calling the Internet evil because people can say nasty things about you on it. And I'm sure Paul Krugman probably reading the comments on his blog has thought that he may be the [?] once in a while. But I wouldn't be working on bitcoin if I didn't think that it will make the world a better place. I just think that giving people control over their money and letting people innovate, great things will happen. Russ: Well, I think he's worried--I'm not sure exactly what it is he's worried about. It seems to me it was sort of the enemy of my enemy is my friend--or the friend of my friend--I'm lost in my really lost in my really bad metaphor, but I think it alarmed him that the people who like bitcoin tend to be people who also like the gold standard. People who like to see the government lose some control over the money supply, and therefore who see and hope that bitcoin is some kind of alternative to the central banking system. Which would be glorious, to me. I would be thrilled if it were actually an alternative to the central banking system of the world or of the United States. Is it an alternative? Is it a threat to the central banking system eventually, potentially? And therefore great for me and bad for Paul? Or is that just kind of an overgrown worry? Guest: Well, I think it could be. I think I said 3 or 4 years ago that there's a small chance that bitcoin could replace the dollar as the world's reserve currency. And I still think that there's a small chance that bitcoin could actually replace the dollar as the world's reserve currency. I say small chance, because--I don't know--anything so new and radically different has a small chance of success. There are all sorts of things that could happen that would make it not be that successful. But theoretically I don't think there's any reason why you couldn't replace the system we have now, where you have central banks trying to anticipate the future and be wise and figure out whether they can control the money supply, and if they can, how they should control the money supply. With a system that's completely deterministic and where the supply is completely predictable and fixed, and the value just depends on the demand--I tend to believe that that will be a better system. That if you can kind of set one side of the equation fixed--the equation I'm talking about is the supply and demand of money. So if you can set the supply fixed and predictable, then I think demand will take care of itself. I think people will be smart enough to figure out how to plan as best they can, in kind of a wisdom-of-crowds way instead of a centrally controlled, central bank way. Russ: I couldn't agree with you more. I wish Milton Friedman were alive so we could get his opinion. I may have said this in our last interview--I don't remember. But certainly the design of bitcoin is in the spirit of his--he wanted a slightly, a slowly increasing, mechanical, mechanistic increase in the growth rate of money over time to take power and discretion away from central bankers. And I think in today's world, John Taylor at Stanford is probably the economist most associated with the idea of a fixed rule rather than discretion--although his rule is a little more complicated than Friedman's. Bitcoin has gone in the opposite direction, slightly. It is definitely a rule-based currency--it's a slight increase, the rate of which decreases over time. Guest: Right. Russ: So, it's certainly tremendously in the spirit of Friedman's idea that that would lead to a stable macroeconomic system, and I think he'd like it. Guest: Yeah. I hope so. It would be nice if he were still around and we could ask him. And my personal opinion, which I have no way of knowing if I'm right or not, is that the rule doesn't really matter as long as everybody knows the rule. As long as it's open and everybody can predict what's going to happen on that side of the equation, then I think that will lead to, eventually, a nice, stable system.
38:41Russ: But it's not very stable right now. So, one of the things you mentioned earlier is your salary is denominated in dollars but paid in bitcoins, where that's a good idea because of the slightly large, sometimes wild, swings in the value of bitcoins in terms of dollars because people are speculating. Do you expect that speculation to decrease over time? And make that more plausible as an actual currency rather than just a payment system? Guest: Yes. I hope so. There is some evidence that that may already be happening. Eli Dourado has been--if you look at Eli Dourado, bitcoin volatility, he actually has been calculating the volatility of bitcoin over time, and it does seem to be decreasing. Which is what we would predict, as more people get involved and we get more liquidity in the bitcoin markets. That you should see volatility decrease. I would be happy in 5 or 10 years if bitcoin is as volatile as gold, for example. Gold prices are still pretty volatile. If we can get there then I think that will show that bitcoin volatility does decrease as people get involved, as the kind of bitcoin economy gets richer. Things should even out. Russ: I don't know if that's true. It's not my area. In the case of gold, there's a natural supply and there are some natural uses. Bitcoins, a lot of people have observed, in a denigrating way--I think Paul Krugman did this as well in the piece we were talking about it being evil--is that, well, there is nothing to anchor it; it's ethereal because it doesn't have any practical use other than everyone believing that it does. So, I guess in some sense the speculative part might not settle down. But I don't know what the answer is to that. I don't know if anybody really knows. Guest: Yeah. I'm not sure anybody knows, either. That is one of the reasons I say bitcoin is an experiment. It's getting to be a scarier and scarier experiment as it gets larger and larger, because if it fails there will be a lot of people who will lose the money they've invested, if bitcoin prices go to 0. Russ: You know what I call that, Gavin? Guest: What do you call that? Russ: Adulthood. That's called real life. I don't wish it on anyone. But that's the way the world is. It's uncertain. And it should be that way. I don't want a world where, Oh, I don't have to worry about that at all, because it's taken care of. That's called being a child. That's where you don't worry at night about food because your parents take care of making dinner for you, so everything is hunky-dory. Yeah, so those of you out there with bitcoins, caveat emptor. Be careful. Buyer, seller, investor beware. It's true we don't want to live in a world where we have to spend enormous amounts of time biting the coins we receive to see if they are really gold, or whatever would be the equivalent with bitcoins. But, yeah. That's the way the world works. It should work that way. Guest: That is certainly true. And as long as the risks don't get hidden, I think that's okay. I think one of the problems with our modern world is that I think there are some risks that are well hidden. That we don't see. Russ: Yeah. That's why you don't eat mushrooms that you find out in the woods unless you know a lot about mushrooms. It is true, tragically, that there are people who don't know a lot about them, and they put them in their mouth. Some are poisonous. So it is a good idea to check the tires a lot, bite the coins, or whatever metaphor you want to use.
42:56Russ: Let's turn to a slightly less thoughtful but perhaps more interesting question to our listeners. Why do you think there is so much interest in Satoshi Nakamoto? And explain for those who do not know, I am tempted to say what he is, or what the name represents. Talk about him and what that is all about. Guest: Sure. So Satoshi Nakamoto is the creator of Bitcoin. He is interesting because he is anonymous. Nobody knows who Satoshi is. I don't know who Satoshi is. I've only every communicated with Satoshi electronically--via email or like Bitcoin Forum posts. Russ: And for all you know, it's like who wrote the Iliad. Not Homer, but someone of the same name. You don't know that the person you are communicating with is the person who created Bitcoin, correct? Guest: That's true. I don't really know. Although, you know, given the communication and given the demonstrated ability to write software code, I am pretty convinced that the person I was communicating with is the same person who wrote the whitepaper that announced the Bitcoin to the world and also wrote the initial implementation of Bitcoin that was the software we were all initially running to participate in the Bitcoin system. Why are people so interested in who this mystery person is? I guess it is, people love a good mystery. It is fascinating that somebody could create this system, release it to the world, and yet remain anonymous. Nobody knows who he/she/they is/are. Russ: It's the 'great and powerful Oz'. You want to lift that curtain and see who's behind it. It's inevitable that you'd be curious. A few weeks ago, a month or so ago, we had a Satoshi Nakamoto alert. Somebody was thought to be Satoshi Nakamoto, but it seems to be a false alert. We don't know, though. Maybe it really is him? Guest: Right. We don't really know. I think everyone in the Bitcoin community believes that the person identified is not our Satoshi. It is a different Satoshi. The person identified is actually named Dorian Satoshi Nakamoto. Russ: Bad luck for him. Or maybe good luck. I don't know. Guest: Well, we'll see. I think things worked out okay. There was a spontaneous movement to take up donations (in bitcoin, of course) to give them some bitcoins for their trouble. I think over $30,000 was raised to give to Dorian and that. Those bitcoins were actually given to him. So, hopefully the story has a happy ending. Russ: What's fascinating about it to me is--there are a lot of reasons a person might want to be anonymous: they don't want to have to answer all the questions the press is going to ask, they don't want to be blamed if something goes wrong. But of course, they don't get any of the glory when things go well, thought I guess you could reveal your identity at that point. Take off your Spiderman mask. Spiderman stays anonymous because it is a mixed blessing to be Spiderman. He's full of angst. Maybe Satoshi is also. We don't know. So much of entrepreneurship is pride-driven, and it is interesting that this person who has created something rather extraordinary is not getting any credit in everyday life. Maybe from a spouse, maybe from--we don't know how many people know, if anyone knows who this person is. Guest: Yeah, we don't. It is interesting. And yeah, I guess I can kind of relate, because when I started getting involved in Bitcoin, I never imagined that I would get pushed forward as kind of Satoshi's heir and the face and voice of Bitcoin. But that is the role I accidentally ended up in, which I am constantly trying to step back from. Although when I do a podcast like this, it doesn't help. Russ: I said we have a lot of listeners, but not that many. You're note going to be mobbed in the street. You're probably going to be okay. Guest: But yeah, I certainly can appreciate why Satoshi might have decided not to seek the limelight and tried to stay away. It is sometimes not fun to have people pay lots of attention to you. And you know, depending on your personality, it can be painful. Maybe Satoshi is just an introvert who really doesn't want the attention. Russ: In the movie version, he would pass on the secret to a chosen heir, maybe you or maybe someone else, and that person would just assume the identity without the world knowing that there was a new Satoshi Nakamoto. It would just be like the emperor. There would just be a new one.
48:28Russ: Now, I am going to shift gears. We are going to move away from the Satoshi Nakamoto mystery. Not that we couldn't have spent the entire hour on it. I do find it somewhat interesting. I wanted to talk about a future guest on EconTalk with a similar but not quite the same name as yours, Marc Andreessen, of the venture capital firm Andreessen Horowitz. He's been a big booster of Bitcoin, which I am sure has led to some confusion because of the similarity of your last names. He has argued, very thoughtfully in my opinion, that Bitcoin's--it's not its currency-ish-ness, currency-ness that's important, but its ability to be an efficient electronic payment system that avoids the fraud that is inherent in current credit cards. It is very low in transaction costs, fees, and other things that slow down transactions, especially small transactions, on the internet. Why is that--if he's right? Why is it that Bitcoin is so efficient relative to, say, a credit card? Guest: Well, Bitcoin was designed for the internet, so credit cards really weren't designed for the internet--they were designed back when you had those slidey machines that they used to use that made impressions on carbon paper. And then you did a physical signature. Not being designed for the internet, there are pretty large hidden costs to using credit cards that we are all paying every day and we don't realize it. Merchants see these costs, and they know how much they are paying their credit card processing companies, and they know if they are an internet merchant, what percent of their sales get charged back. Actually, a lot of people don't know that you can dispute a credit card payment for up to, I think 90 days and get your money back, and for merchants that are operating on the internet, chargebacks are a huge cost of business for them. Both because they lose the money, but also because they are actually changed for every chargeback. Each chargeback costs them on the order of a few dollars in chargeback fees. So Bitcoin is designed from the ground-up to be a creature of the internet, and to work efficiently on the internet. Once a Bitcoin payment is broadcast, and then confirmed, it is final. It's not going to get charged back. You could theoretically roll back a Bitcoin transaction once it's gotten confirmed by the network, but the cost of doing that is specifically designed to be much higher than any possible profit you would get from doing that. So it just doesn't happen. The big Bitcoin payment processing companies that I mentioned before that handle payment processing for merchants are seeing basically zero fraud and chargebacks for Bitcoin transactions, which is just a huge increase in efficiency and lets them charge much lower prices, which makes merchants really happy and excited for Bitcoin. And is part of what is driving Marc Andreessen's enthusiasm for Bitcoin. I think the other interesting thing that Marc has written about and which I am hoping you'll talk with him about is his notion of permissionless innovation. And that: If you have a technology like the internet, where you don't need permission to participate, you'll get a whole lot more innovation. Back in the 1990s, the internet started up. Anybody could create an internet company and lots of people did. And lots of them failed. Bitcoin is doing the same thing for a payment network. You don't need permission to participate on the Bitcoin payment network. You just write some software and you start issuing transactions or looking at transactions. And participating. And so we are seeing lots and lots of exciting innovation happening. A lot of which will fail miserably. And again, buyer beware. But I think, over time, you will find out, what are the really great ideas and what are the really great companies. We'll see some really exciting things happen.
53:07Russ: So what kind of organizations are out there trying to facilitate that growth? Doing that permissionless innovation? A lot of venture capital firms I know are funding Bitcoin-related firms. What are they doing? What's going on? Guest: Umm, well, for example, there is a company called Coinbase that is a Bitcoin wallet company that makes it easy to connect your Bitcoin wallet to your bank account. And it's a great thing. In and of themselves, they are pretty innovative and they have some interesting stuff. But they actually recently ran a competition which I was actually a judge for, where they have a programming interface where you can interact with their service and so people can connect to Coinbase to make things happen. They had, I forget if it was 20, 50, 100 different--it was on that order, of number of--people who had created little applications, little ideas of things that you could do using this programming interface to their system. And I think the winning one was a dig for Bitcoin system where you could designate a place and put some virtual Bitcoins there, and then if you visited that place with a cellphone that knows where you are, you would get awarded some bitcoins for being there and "digging" for the Bitcoins. Which is-- a wacky idea. I have no idea if it will take off. Like geocaching for Bitcoin, but it is all happening in the virtual world overlayed on top of the physical world. That's an example of--it's innovative. You can imagine a store doing this to get people to actually come and physically be inside their store, and then instead of handing out cash, they get bitcoins onto their cellphone. Maybe it will take off, maybe it won't. It is certainly innovative; it's certainly interesting;, it's certainly combining a whole bunch of different technologies together in a new and interesting way. That's an example of the kind of interesting ideas that people are experimenting with. Russ: Is anyone out there recruiting Amazon, trying to get Amazon to take Bitcoin? To take an example. It could be any large internet seller. Is there anybody out there who is marketing Bitcoin? Is that you? Guest: That is not me. And it is not really even the Bitcoin Foundation. Because, like I said, the Bitcoin Foundation is mainly a trade organization, so representing the companies that are already involved in Bitcoin. Some of those companies may not want us to try to recruit Amazon, since that will be a big competitor. Russ: Sure. Yep. Guest: I would guess--I have no inside knowledge--that some of the big Bitcoin processing companies like Coinbase or Bitpay are lobbying Amazon and trying to get a meeting with Jeff Bezos to convince him that he will save a bunch of money and get a bunch of new customers for using Bitcoin. At least if I were working at one of those companies, I would certainly want to help make that happen. I think recently Jeff Bezos actually said that he don't see any reason to embrace Bitcoin. They are busy doing the things that they are doing. Russ: Getting their drone fleet all tooled up. Guest: Exactly. Busy making deliveries. Russ: That's a lot more important. Guest: A whole lot faster. And you know, he may be right. Bitcoin is still, in the grand scheme of things, pretty small. But maybe in 5 years, it will be obvious. I heard somebody make the analogy to--imagine going to your local coffee shop 5 or 10 years ago and saying, 'You really need wireless internet access for your customers.' In fact, it may have even been on EconTalk. I'm not sure where I heard this. That would have been a really hard sell to a coffee shop owner. And yet now you need to have it to be competitive, for people to go there. I think Bitcoin could be the same way. If it keeps to explode the way it has been, yes, you'll need it if you are an online merchant.
57:38Russ: One of the things that is interesting about it, as someone who is an outsider, is how it got started and how it overcame the issues of trust. George Selgin has written some interesting things about that., where he asked the question: Because there is no natural use for it, who was the first person or people who accepted bitcoins when it was not obvious that there was something you could do anything with them? And eventually, there becomes a sort of trust. And one of the things, at least in theory, that strikes me about it is: there are a lot of people out there who just think it is just really cool, and who would like it to exist, and who have invested in it, as we talked about earlier, as a sort of community, both as a technological wonder and achievement but also as a thing of practical value. And, given that feeling, people have an affection for it. You could describe as irrational. I don't; I think it's just hard to describe. It is different from other forms of affection that we are used to. And that affection will help it spread and will encourage merchants and others to use it who feel the same way. Guest: Yeah. And I think any investment requires a leap of faith. Even if you are investing in something physical, you have to have faith that your coffee shop will be successful or that your interstate highway system will make your economy more productive. Bitcoin was an odd leap of faith, because there is nothing physical. It is all very kind of mind stuff. I think it is true that the "Bitcoin community", in scare-quotes, did take that leap of faith and did start trading bitcoins and assigning value and have managed to bootstrap it. Which is an amazing thing. Russ: What's the most surprising thing you've learned in the last three years? Maybe that, what we just said. But is there something else that comes to mind? Guest: I think it has been surprising to me how tolerant of imperfection people are if the incentives are aligned correctly. So, we've had, Bitcoin has had a rough three years. There have been ups and downs and sideways. All sorts of things have happened. Russ: Some crashes, bubbles, exchanges have gone out of business-- Guest: Bubbles, crashes; we've had technical issues that could have possibly crashed the Bitcoin network. But everybody involved wants to see it succeed. If you are an early adopter in Bitcoin, you want to see it succeed, either for philosophical reasons or pure profit-motive--you've invested time and money into this damn thing--I don't want it to fail. And so, when you have that many people invested in its success, solutions get found. Things recover. It has been surprisingly resilient to, things that, maybe three years ago, I would have predicted, 'If this happens, then Bitcoin is dead. If a Bitcoin exchange goes out business, we are done for.' But that happened. It certainly was not good for Bitcoin, but Bitcoin soldiers on because people are invested in trying to make it succeed.

COMMENTS (14 to date)
Jeremy writes:

Very good discussion. Thank you for revisiting the topic. Question: Is anyone lending (or trying to lend) in Bitcoins? My guess is once lending starts the existing powers will force themselves on the market - imposing regulatory costs and eventually shrinking the market.

Doug Palmer writes:

Another great interview on bit coin, money supply, and implicitly the fiat behind all of our modern fiat currencies. Bit Coin is simply another fiat currency, except the fiat is written by a crypto not a government.

http://www.polygon.com/2014/5/5/5677734/bitcoin-plex-isk-eve-online

The URL I linked is for an interview/story with another economist in residence of game called Eve Online. They are modeling and regulating three difference currencies. He may be an interesting guest to talk about the role of regulation, the limits of modeling, the digitalization of currency, and what economists can learn from these Massively Multiplayer Online Games.

Keep up the good work.

Michael Byrnes writes:

Intersting podcast. A few thoughts:

1. I would have liked to hear more about Mt. Gox. Lots of people lost a lot of bitoins there, some people claim they were stolen. What happened there, and why should someone contemplating acquiring some bitcoins not be overly concerned by that?

2. Tyler Cowen had an interesting post about Bitcoin and potential competitors. In essence, I think he argued that the more successful "virtual currency" is, the less successful Bitcoin will be. If the use of virtual currency really "takes off" and becomes widespread throughout the world, then the vast majority of future users of virtual currency are people who do not own any Bitcoins today and who have no real investment in Bitcoin specifically. On the other hand, if Bitcoin stays a niche product (such that a large share of future users currently DO own Bitcoins today), then within that context Bitcoin is more valuable due to its existing network effects, less incentive to produce an alternative, etc.)

Bitcoin's limited supply is a supposed selling point, but there is no such limit on the supply of "virtual currency". Network effects alone aren't enough to stop competition - otherwise myspace would be doing better than Facebook.

3. The credit card discussion was interesting, but seemed one-sided. Sure, sellers would like to know that all sales are final and that there will be no "chargebacks". But as someone who buys things with credit cards, I value the ability to dispute a charge tremendously. I think I've only ever done it twice in 20+ years of using credit cards, but even so I sleep easier knowing that I have that protection. And, indeed, I default to credit card use rather than cash or debit card because the protections are greater. For me, I am less concerned with paying a slightly higher price (although it's unfair that users of cash are also stuck paying that price).

4. I think the supply and demand discussion missed a key point. Stabilizing the supply of money isn't beneficial - what is really needed to achieve monetary stability is to stabilize the left side of the equation of exchange (MV=PY). If M is absolutely fixed, then changes in the demand for money will wreak havoc on an economy, as in 1929 and 2008. Central banks, flawed though they are, have a big advantage for this reason - they can at least try to ensure that the supply of money is adequate to meet the demand to hold it. Perhaps fractional reserve Bitcoin banks that are not overly regulated could give it a go in the absence of a central bank.


Airto Vienola writes:

Pretty futile discussion since it missed two of the most crucial issues when dealing with currencies of any kind:

1. Does it make any sense to tie productive assets (computing time and energy) into creating accounting units? Fiat money has the great benefit of not requiring any productive input, all factors of production can thus be used on things that create wellfare. Mining bitcoins is hugely energy and computing intensive.

2. Can we have a currency that has a built in deflationary bias in it? Sure, negative nominal interest rates would be less of a problem with electronic money, but still: do we want to have persistent deflation?

Russ Roberts writes:

Airto Vienola,

On the deflation point, it was discussed here in the earlier conversation with Gavin Andresen.

Andrew writes:

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Mort Dubois writes:

Bitcoin sounds like a religion to me, from the catchy origin story to the mysteriously passive overseer to the substantial faith and acts of commitment required by its supporters.

Ethan writes:

I'd like to second Michael's point #4. The discussion on fixing the supply of money was lacking in any economic foundation. The list of the functions of currency in any undergraduate textbook would include things like
- Medium of exchange
- Store of value
- Unit of account

We care little about the stability of the total supply of currency in deciding whether to use it for these purposes. Instead we care about the stability of the value of the currency, for example its price relative to goods and services (the price level).

The 1960s notion that central banks should target a steady growth rate of money was not an end in and of itself, but a means to achieve price stability based on the MV=PY identity and under the assumption that velocity (e.g. money demand) is stable. This assumption failed miserably when central banks attempted money-growth targeting in the late 70s and early 80s and central banks quickly abandoned quantitative targets for inflation targets (and using interest rates rather than monetary quantities as instruments). Whatever our concerns about central banks may be, they (including those in many developing countries with weak institutional capacity) have proven very capable at controlling inflation.

Even if there were no speculation on Bitcoins (and I do not doubt there is some), the instability of Bitcoin value is inherent in the flawed notion that a fixed supply of money is desirable. That Andresen has his salary denominated in dollars rather than Bitcoins is evidence that providing "confidence" in the supply of a currency provides little confidence on any dimension that is helpful to its users.

Eric Willson writes:

Niall Ferguson makes the case that all money is faith based, and that claim applies here to Bit Coin, particularly the last sentence here that I've quoted. "What the conquistadors failed to understand is that money is a matter of belief, even faith: belief in person paying us; belief in the person issuing the money he uses or the institution that honours his cheques or transfers. Money is not metal. It is trust inscribed. And it does not seem to matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display. Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the Pacific islands of Yap. And now, it seems, in this electronic age nothing can serve as money too. "

Gandydancer writes:

If demand is zero then demand divided by non-zero supply is still zero no matter how restricted the supply.

Bitcoins are tulips with even less inherent value. At least fiat currencies are backed by armed men who demand payment of taxes in the product conjured by central banks.

Those who control the central banks will not tolerate the competition should it become serious, and how many divisions does Mr. Andresen have?

None, which is numerically equal to the future value of Bitcoins.

Shawn Barnhart writes:

One thing I don't recall being mentioned during this discussion was what Bitcoin-like currencies existed before Bitcoin itself.

It seems strange that the first iteration of this kind of a currency got everything "right" and that there seems to me that there are probably technical critiques of its design and implementation that would seem impossible to revise.

The most obvious one seems to be the fixed number of Bitcoins. While this has some significant virtue from a macroeconomic perspective, it seems like it would be a practical issue in scaling Bitcoin as a currency. While Bitcoins themselves are fractionally divisible, it seems impractical to have the most common denomination of a currency expressed as a 1/10000 of a bitcoin (I'm basically dividing the maximum number of Bitcoin by a rough value of M0).

I also wonder what would happen if say Amazon, EBay and Alibaba (sort of the Chinese Amazon) would decide to get into the cryptocurrency business and create a cryptocurrency that could be used outside of their web sites but which would have an intrinsic value defined by what it could buy in material goods from their web sites without a specific national currency conversion. Such a scheme may be interesting, especially if they can convince buyers and sellers to accept payments and refunds in such a currency. They could provide a clearing service for third party merchants to accept payment to further encourage its use. There's also the value it would provide in being independent of a national currency, freeing their transnational businesses from currency convertibility.

Isaac Crawford writes:

I was disappointed you guys didn't talk about the possible alternative uses of the blockchain. There have been numerous articles discussing the possibility that the future of bitcoin lies not with its use as money but in the many different ways a public ledger can be used. Things like namecoin and Etherium are interesting ideas. Let's get beyond money and think about other kinds of uses.

Ken Daniszewski writes:

I share Airto's concern (above) that there must be something intrinsically wasteful about pouring ever-increasing amounts of electricity and billions of computer cycles into the creation of the next marginal Bitcoin.

Granted, it creates trust, which has some value. But I can't believe it's an optimal system to burn up all that electrical energy and computer time just to mint bitcoin.

By analogy, it seems as though we were to say we that each year we are going to issue the next n bitcoins to the person willing to incinerate the most corn, but that after that the bitcoins thus created would be trade-able, since their supply and provenance would be strictly limited and controlled.

My fantasy would be that someone would create an alt-currency which has some basis in promoting activity which directed human behavior in more intrinsically productive directions.

For example, what if a bitcoin were issued for each new n megawatts of installed (wind/and/or/solar) (generation/and/or/storage) energy capacity? This would drive economic activity towards creating something of true economic value. [or even, Could government subsidies for alternative energy be denominated in this sort of alternative currency?]

These comments are not meant to take anything away from the people who created the bitcoin economy. Their accomplishments and foresight have been truly phenomenal. Whatever the faults of the bitcoin system as it now exists, the organizational ability of the people who set up this system is astonishing. Doing what they did would not be easy, and they deserve credit for their pioneering genius.

Finally, has anyone else thought about possible comparisons between bitcoin and wampum? I was intrigued by reading in the history of the Plymouth Colony that the English at one point set up modern, industrial machining, wampum factories in New England, once the British settlers realized that the Native Americans would trade furs for those polished sea shells, which could be manufactured more efficiently in factories of English design than by the traditional Native American methods. So, is everything old new again, as regards bitcoin and wampum?

Piotr Fedorowski writes:

This was unfortunately rather basic and shallow. I was hoping for a more in depth discussion about economical basis of Bitcoin and I don't think Gavin has any economics background. If I may recommend someone, I think Peter Surda is the best on the subject.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2436823
http://www.economicsofbitcoin.com/?m=1

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