Russ Roberts

Wences Casares on Bitcoin and Xapo

EconTalk Episode with Wences Casares
Hosted by Russ Roberts
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Wences Casares, bitcoin evangelist and founder and CEO of Xapo, talks with EconTalk host Russ Roberts about how bitcoin works, the genius of bitcoin's creator, and how Xapo is structured to create security for bitcoin banking.

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Podcast Episode Highlights
0:33Intro. [Recording date: July 14, 2015.] Russ: So, let's start with your story. How did you come to be an evangelist for Bitcoin? Guest: I first learned about Bitcoin in 2011. I live in California, Palo Alto. And a group of childhood friends from Argentina were doing a project together and we all needed to send money for that project. And I couldn't send money from California to Argentina, so I was trying to see if my sister, who is there, could give my friends some money; and I could pay her later. And one of my friends who is not tech-savvy or financially savvy, said, 'Hey, why don't you use Bitcoin?' And I said, 'What'? 'Bitcoin. Oh, I read about this digital currency where you can send money very easily.' So, I was curious and I looked up online; and I'm thinking crazily so I found someone who was willing to meet with me at a cafe in Palo Alto and gave me some bitcoin and I gave him the cash. And then I just got the bitcoin on my cellphone and I sent them to my friend in Argentina; and the next day he has sold them for pesos. And I just couldn't believe what happened. I was very skeptical at first but because of what I just saw happen, I began to research it, and the more I learned about it the more I was fascinated. And I felt like I was witnessing the beginning of the Internet, that kind of fascination. I felt, like, wow, you saw the Internet at the beginning you had the sense that it was going to change the world forever. I think that Bitcoin is going to change the world more than the Internet. Russ: Now, what year was that? Guest: 2011. Russ: And what were you doing--what had you been doing with your life up till then? Guest: I've always been a technology entrepreneur in finance. I'm originally from Patagonia, some part of Argentina; my family lost everything to economic disaster many times. Russ: Yep; more than once. Guest: Unfortunately, yes. And I did the largest online brokerage in Latin America; I did a bank for the [?] in Brazil; I did an online bank in Europe; and I was working at the time for [?] here in Silicon Valley when I ran into Bitcoin. Russ: So that was 4 years ago. Guest: Yeah. Russ: So, why--when you said you were at the start of something revolutionary, world-changing--what about it then and what about it now is important? Obviously, you made a transaction that would have been very difficult to make. So that's one use of bitcoin, to send money across international borders. But why do you think it's so important? Guest: People make Bitcoin more complicated than it is. It's quite simple, actually. There are only 3 things that matter with Bitcoin and that make it revolutionary. Those three things are, number one: Nobody controls Bitcoin. Not Russ, not any one person, not any group of people, not any one company, not one country. It is a thing. And it's open for everybody to use it but nobody can change it or alter it in any way. Nobody owns it. It's completely distributed. And that's incredibly powerful and much, much harder to accomplish than it seems. That's very unique to Bitcoin. That's number one. Number two is that there will never be more than 21 million bitcoins. Up until now, whenever you had a form of money, there was no way to know that it was really scarce. And if it's not really scarce, it doesn't hold value. So, in terms of the capacity to hold value, the best form of money we've seen, in 5000 years, is gold. Because it's really scarce. Because it's really hard to mine and we mine very little--2% a year, right? And so [?] than any other currency we've seen. But we still mine 2% a year, whereas with bitcoin, there will never be more than 21 million bitcoin. That's unique. We've never seen anything like that in the history of mining. Russ: And that's the result of the technology and the way it's been created. Guest: That connects with Number One, which is--it's not up to you or to me or to anyone. Nobody can change 21 million, right? And that's really, really powerful. It's the combination. There will never be more than 21 million and we don't need to trust anyone--it's mathematics. And the third and last point that makes Bitcoin unique is that if I own some bitcoin, I am free to send those bitcoins to anybody, anywhere in the world, in real time and for free. And that, until now it was impossible. If I wanted to send money to someone, we both need to trust some third party--a bank, a settlement house, a clearing house, VISA, Mastercard, paper[?], someone, we both have to trust. And those were initially inefficient and expensive and it took time. And now, just like it happened with the Internet it's happening to money that I can send that value to anybody, anywhere in the world in real time. So when you combine those three things--that is, nobody controls it, the most scarce you've ever seen, and is the most free in transfer we've ever seen--it's the best form of money we have ever seen. It may take 10 or 20 years to get established but it's going to change money like the Internet changed information. And it's going to have 4, 5 billion people drawing[?] money better than the Internet. Russ: Why? Why is that important for those 5 billion people? Guest: Because if you are one of the 5 billion people that lives on cash--there is a little over a billion people who have credit cards and debit cards, right? And most of the world does not have that. And so they see that this revolution[?] goes by them. They cannot benefit in any way. And they have to rely on cash. Cash is expensive to keep at home. It's expensive to transport. It's risky. All payments need that you move there physically, usually by public transportation that is slow, increasing the risks of its being stolen. It's ridiculous[?] but it's very expensive to be poor. And it's very expensive to live on cash. And then, when there are problems with a currency like I saw growing up in Argentina, that poor get the worst end of that trade whereas the rich can move their assets somewhere but the poor can't. So Bitcoin changes all of that. So, now, anybody with need of cash, all you need is a cellphone; anybody with a cellphone can get some bitcoin and participate in the digital economy. And have an alternative to the local currency, if they don't trust it. So both of those things are incredible. If you ask an average person in Africa, a farmer in Africa or a person in Asia, who does not have access to a bank account, 'What do you prefer: Perfect access to information or perfect access to money?' they will prefer perfect access to money. It's more important. Russ: Sure. It's nice to be able to look up, say, how far Jupiter is from the earth. But that's not so crucial if you are a subsistence farmer or a small businessperson in Uganda. Guest: That assumes that you have your basic shelter, food, education covered. Then it's great to see how far Jupiter is, right? But if we don't have those covered, I prefer to cover those first. Russ: Correct. And there's lots of people in that group.
7:41Russ: So, let's talk a little bit about the technical side. We've talked about this before on EconTalk. It remains somewhat mysterious to me; I think we've made some progress when we talked to Nathaniel Popper; and Wences is one of the stars of that book. That's how I found about I found about you, was in Nathaniel's book. He has a lot of intriguing people in his book. You were one of them. The technical side is hard for a nontechnical person to understand. The way I understand stand, and correct me and steer me. So, I'm going to send you bitcoin. How does that happen, in terms of what has to take place? What is actually taking place when I do that? I have to--tell me. I was going to actually try and decided I'm going to let you try. Guest: So, all of the bitcoins in existence are like a snail[?], in that I could never just show you a snail and show you a snail in it's shell. All the snail in the shell. All of bitcoin is living in a bitcoin address[?]. I cannot show you a bitcoin that is not attached to a bitcoin address. By definition. So, if [?] snail with a shell, you have a bitcoin attached to a bitcoin address[?]. So, if you have some bitcoin, by definition they live in some bitcoin address. And what makes that bitcoin address yours is that you have a key that gives you the right to unlock those bitcoins. And the only people who, the only person who can use those bitcoins is the one who has the key to that particular address. So you have a bitcoin address that has 2 bitcoins, and you want to send one of those bitcoins to [?]. So what you do is you put together a transaction from this address, I want to send--from this address that has two bitcoins, I want to send one of those bitcoins to this other address. And to do that, you sign that transaction--imagine like you are stamping it with a private key-- Russ: Which is my okay--to give Alice access to my one bitcoin. Guest: Yeah. And whenever someone--and that transaction gets broadcasted to all of the Bitcoin system. And anybody that [?] the transaction can see that this address had 2 bitcoin; that the owner of that address wants to transfer 1 bitcoin to this address; and that signal, that stamp of approval that you did with a private key, shows everybody that you actually own the private key to that address without them needing to see-- Russ: What it is. Guest: The key. So you might have a stamp where people get to see the stamp of another, how do you call the thing that you use stamps with-- Russ: I don't know, but it's a good question. A stamp. It's like a fingerprint, though-- Guest: It's like a fingerprint, but not the finger. Right? And with that, they can see, okay, this person really has the private key. Without needing to see the private key itself. And then the transaction--there are many other transactions like that. And every 10 minutes, all of those transactions get grouped in a block; and a block of transactions that have been verified gets added to the blockchain. Russ: Which is the record of all transactions that have ever taken place from the beginning.
10:43Russ: So, how does that get verified? Let's go to that step. Guest: So, there are lots of people around the world, lots of servers around the world, that are grabbing all of those transactions; group them neatly in a block, and writing all the processes to verify that that address really has the 2 bitcoin that you say it had, that that signature is really the right signature that was generated with a proper private key. And running a number of verifications--basically these are the people who are the bitcoin muscle, is to really to make sure that those bitcoin haven't been spent before, etc., etc. And if one of those people will get to put the next block, the block added every 10 minutes, the block containing all of the transactions of the last minutes, whoever gets to validate and insert that block gets a reward for doing that. Russ: That's how they mine the next set of bitcoin. Guest: Yeah. That reward right now is 25 bitcoin, 25 bitcoin every 10 minutes. Russ: That's a lot of money right now. A bitcoin is worth about--I just saw, $292? Is that correct? Guest: Yeah. Russ: So, if I can verify that, I'm going to make 25x$292? Guest: Yep. Russ: That's a lot of money. So, how hard is it to do? Guest: So, a lot of people thought what you just thought and they want to do it. So the way that is--who gets to add the next block and therefore who gets the 25 bitcoins, is decided by a lottery. So, you want to buy tickets to the lottery. And the only way to buy--the tickets to the lottery are issued against processing power. You have 1 processing power, you get 1 ticket. You have 2 processing power, you get 2 tickets. You have 5, you get 5 tickets. Right? Russ: So, the more processing power, the higher my chances of winning the 25. Guest: Exactly. Which was why [?] Satoshi's--it was a brilliant design to ensure that there is as much processing power as [?] can dispose. Russ: So, when you say 'processing power,' how should I think about that? So, here's my Mac Air that's sitting here on the table between us. It doesn't have much processing power, I assume. Guest: If you get all the Mac Airs in the world and all of the laptops in the world and all of the desktops in the world, all of the computers in the world, and you put them to mine bitcoins, they will not mine as much--they won't have as much processing power--as the current bitcoin mine. That's how much [?] processing power there is. Russ: So, what does that mean, then, to say they have a lot of processing power? Is it the speed at which they can verify? Guest: It's basically--the most important thing that it means is that it's trustless. If it was just one computer doing it, you and I could put two computers and take over the system. Right now, if someone wants to take over the system, they need to put a lot of processing power. Maybe a government can do that but it's very hard for a person or a company to do it. That's why it's trustless, because there's way too much processing power. Russ: But when you say processing power, what's the metric? Guest: Hashes per second. Russ: Which per second? Guest: Hashes per second. Russ: So, what is a hash? Guest: It's how quickly you can sort of do a mathematical function. How many times can you-- Russ: So it's processing power. The ability to do a complex calculation at high speed, where high speed can't even really be talked about. Guest: The amazing way to think about it is there is a lot going on every 10 minutes, and people come by tickets, the lottery, and a lot of people are buying tickets; and you give processing power, you get a ticket. Russ: So, you said that was a brilliant idea by the mythical but real Satoshi Nakamoto, the creator of the software that makes this happen. It's brilliant because--it gives people an incentive to put processing power into the system? And because it's also very competitive. Is that the way--? Guest: There are many, many other things that Satoshi did that are brilliant. And this is brilliant, this one thing that he did is brilliant in many ways. But one way in which is brilliant, is the mechanism by which you almost warranty that there will be processing power serving Bitcoin. Bitcoin is not served by Google or by Amazon or by a government. It is not even one server somewhere-- Russ: Decentralized. Guest: It's completely decentralized. How do we know that there will be enough people doing that when that incentive proved to be [?] we have hundreds of thousands. Brilliant. Russ: Genius. Guest: Another part which is brilliant, is: If you and I came up with Russcoin and we are going to launch it on Monday, one of the first decisions we are going to have to make is: How many Russcoins are there going to be on Day 1, outstanding? Let's say $100 worth of Russcoin. They cannot accommodate a $1000 transaction or wholely[?] consistent. So, how many there are out there is quite important. So we say, 'Look, there are $3 million dollars' worth of bitcoins, so we are going to launch on Monday with $3 million dollars worth of outstanding [?]' Okay. The next thing we have to answer is: Who is going to own that $3 million? Russ: The day we start. Yeah. Guest: So we say we have a million and a half for Russ and a million and a half for Wences. And people don't buy that. Right? Russ: [?] Guest: So we have to allocate it over time with some process. But then what happens is most people say, 'I'm going to buy that once it has been allocated, distributed.' It's a chicken and egg problem. And this mining process was a brilliant process to allocate it over time. But-- Russ: widely-- Guest: [?] something that was very useful to a network and very widely distributed. So, that was very, very powerful. Russ: Yeah, that's extraordinarily clever. Guest: Extraordinarily clever, and people don't realize how hard it is to replicate. It's like, can't someone come up with a better Bitcoin? It's luck. Bitcoin has life. What I mean by life is, Bitcoin is something that has zero intrinsic value. Russ: You say it's 'zero.' Guest: Zero. No intrinsic value at all. But now we have collectively determined that it has some value that is non-zero. Right now it is $292, but it goes up and down. The value of Bitcoin is not technology, not financial, not regulatory. It's magical. Just people deciding that something has value. Russ: Correct. Guest: And it's completely arbitrary and completely subjective. So, you have lots of different currencies and experiments in which everything is very nice but they haven't got a value. They haven't gotten to a point that there is a social consensus that they are worth something. Imagine the earth for billions of years didn't have life. And there is a period of--imagine 3 seconds in which, second 1, the earth without life; second 2, something happens; and second 3 is earth with life. That's magic. And it happened. We're still trying to figure out how--and there are many theories. Russ: Yeah. Guest: But it happened. There was earth without life and then there was earth with life. So, there was Bitcoin without life from January 2009 to late 2010--Bitcoin was one more experiment without life. Russ: It was theoretical paper--it was an idea. Guest: It had--no, but it was issued in 2009-- Russ: Right; it existed. Guest: It existed, it was around; but it was like Monopoly money. It was free. And then at some point at the end of 2011, some magic happened and it had value and it had life. That is incredibly hard, one of the hardest things about a real currency, which bitcoin has and other currencies don't have, [?]. Russ: Right. It crossed that boundary, you are saying, which might not have happened; but it did. And once it did, it suddenly--people are investing millions of dollars into [?]-- Guest: And you cannot--it's not like--just like we don't know how to create life from scratch. It's not something that we can recreate technically or financially. It's magic that has to happen.
18:42Russ: As we say in economics, it's emergent. It's complex. We just recently have been talking about the fact that it's hard to create a prairie. We know what a prairie has in it. But that's not enough. Like you say: We know what a successful currency is. You trust it, it's affordable, it's lightweight. It's divisible. So, it should be easy. But it's not. Because there is a certain set of, as you say, magic--a sequence of things that have to happen and we don't fully understand the process so we can't fully create it from scratch. That's a beautiful idea. Guest: Any form of currency performs two functions--two very different functions. Currencies are used for saving and currencies are used for paying. Russ: Store of value and transactions. Guest: Yeah. I was trying to say it in a less academic way, but that's the term-- Russ: But I have a handful of over-educated listeners, and for them I want to--in case they don't understand everyday language. Guest: So, if you look at all currencies that have ever existed and you compare the capacity to save, to store value, nothing beats gold. And nothing beats gold not by a little, but by orders of magnitude. And the second thing, second best thing at storing value after gold is land. And it's really a very, very far second because land has carrying costs and taxes and various-- Russ: And if you have to leave the country, you can't take it with you. Guest: Yeah. And the value of it changes dramatically with political changes. And if you compare gold versus any currency that has ever existed, it's a brutal comparison. Gold has been much better at storing value. And the only reason why that's the case is because gold is more scarce than any other. And you compare bitcoin to gold in terms of scarcity and it's hard to say how much gold there is above ground; it's even harder to predict how much will be mined over the next 10 years. But in the case of bitcoin you can count on there will never be more than 21 million bitcoin. So as a store of value, bitcoin will be much, much superior, orders of magnitude superior than gold. I know that today it's very volatile; but just in theory it's the only thing-- Russ: Gold is also volatile. Not necessarily historically. But it has its own challenges. Guest: But if you have a little bit of gold, every year you have a smaller percentage of the total because there is more and more gold being mined. You have a little bit of dollars, every day you have a little bit less of it, because more and more of it is being printed. Russ: And if you have a peso, every hour. [?] Guest: If you have a peso, every hour. With bitcoin, whatever percentage of 21 million you have today will be the same percentage 300 years from now. We cannot say that of anything else that I know. And that's why it has historical value, bitcoin, with the mass[?] appeal than anything we've seen before. And in terms of payment, the best form of payment that we've seen to this day, the most universal, is the dollar bill--there's billions of people around the world who have no problem accepting a dollar bill. But the problem is that I have to have a dollar bill and give it to them physically. If I don't have that--there's billions of people who will accept that. But there's only 30 million Americans who will accept credit cards, and there's even less people who will accept PayPal. Russ: And even fewer who have those. Guest: Yeah. So, we have never seen something like Bitcoin before where we have billions of people, anybody with a cellphone, who can accept it; and we can move it easily. And you put those two together, and it's by far the best form of money we've ever seen.
22:29Russ: Now, there's some problems with it. We're going to get to those in a little bit. But I wanted to ask you something about the store of value--which is--I want to come back to your magic point. People say, 'Well, Bitcoin--it doesn't have any intrinsic value. It's not like gold.' Well, really gold doesn't have any intrinsic value. Yes, you can use it for your--in dentistry. It's nice for jewelry. But it's really a social convention that gold is something that we decided. Which of course 'we' didn't--there is no 'we' and there's no 'decide' and there's no group that sat around and said, 'Wouldn't it be great if one of the really scarce metals that's hard to get out of the ground would use--'. It became, it could have been silver, it could, gold's[?] used better. A little bit better I guess; I'm not quite sure why. A little bit harder to get out of the ground, scarcer. It could have been--it's like when somebody says, 'It's not like diamonds.' Diamonds are really, totally a social [?] convention. Their main use is--get engaged to my wife-to-be that way. But why do we decide on the diamond? Once that happens, once that magic becomes in place it's very powerful. And so, Bitcoin has crossed, perhaps, the boundary into historic value. Potentially. Versus, can it maintain that if it's not used in transactions? Guest: I absolutely think that we can look--all the gold above ground is worth about $8 trillion dollars, and nobody accepts gold for anything. It's purely a sterile value. Russ: Right. It's a total social convention. Guest: Right. And in the case of bitcoin, it's so liquid that it will impossible to contain it to just historic value. Now because there are suddenly 13 million people out of 7 billion who own it. Russ: Thirteen million out of 7 billion have some bitcoin. It's a pretty big number, actually. It's a very small number, but it's kind of a big number. If you asked me to guess, I wouldn't have said it was 13 million. Guest: Yeah. There's more people playing[?] every hour. Russ: [?] Yeah, of course. Guest: So, there are 300 million people paying cash [?]. Russ: Heh, he. Guest: And while the number is small, it makes a lot more sense as historical value than it does as a payment [?]. Once we get to 200 million people, only in bitcoin, which would be more people owning bitcoin than have paper accounts, then there would be no way you can prevent those people to use it as a payment mechanism, because it is mostly good instrument-- Russ: [?] as that. Yeah. Guest: So, Bitcoin--I see a lot in America, especially I think Europe, central Europe, too focused on Bitcoin as a payment mechanism because they don't understand or care for the store of value. Russ: Because we have a good one already. Guest: You have a good one already. But Bitcoin is developing the other way around. It's first a good [?] creator store of value. Eventually it will be a great [?]. Russ: And as you point out, if you are in a place in the world where your currency has been debased repeatedly, and cannot be trusted--you can't count on the fact that it won't happen again--then you are not going to be very attracted to it. And yet, many of those places are the places that have the least capacity to enjoy it. They have the least Internet access. They have--right?--the places that "need it the most." The paid places that really could use a good store of value, that have, say, insecure governments or governments that can't be trusted or exploitive governments--they are also less likely to have access to the Internet. Guest: No, but that's changing really fast. Russ: [?] Guest: [?] Finally has nothing to do with income or that--I don't know if it's going to take 5 years or 10 years but ultimately we are going to end up with several million people with smart phones. It's irreversible. And they are all going to have access to the Internet; and once they have that, they all they need to get a bitcoin.
26:07Russ: So, let's talk about some of the problems. And that will be our segue into Xapo and what you are working on to try to solve some of those problems. And again we'll also try to highlight some of the technology. So, my key, to my address, is an actual string of letters and numbers that's generated, I assume, randomly by--how? Guest: When you-- Russ: I don't use Xapo. Which I used yesterday--I signed up for a wallet; we'll talk about that when we get to Xapo, your company. I'm just a technology guy; I'm not interested in a Xapo thing. I'm out there right now listening to this; I want to have some bitcoin. What do I do? Guest: You can create using an algorithm; you can create using a pair, a bitcoin address plus its private key, without asking anybody's permission. Russ: How do you do that? Guest: There is an algorithm that you have to use to make it compatible with bitcoin. Russ: How do I find out about that? It's in the founding documents of Bitcoin? Guest: Yes. It's somewhat technical but all the information is online for you to be able to use. Russ: Okay. So, I do that. I now have my 64-digit key-- Guest: You mentioned digitally go and buy the book by Nathaniel Popper. I think that of all the things I've read, that book is the best job of explaining Bitcoin-- Russ: I agree-- Guest: in a very clear way, an entertaining way. And in the Appendix he has a great explanation of these more technical issues that sometimes confound people but that they shouldn't [?]. Russ: Okay. So, I've got my 64-digit key. And I go out and I paint your house, and you say I did a great job; we agree that it's 100 bitcoin, and I'm sending to you--I'm going to send them to you. And I take them in return for the painting; and I now have 100 bitcoin in my account. Guest: To be clear, for you to receive the bitcoin you need to use, to do anything or to use the private key. Russ: The sender, it's up to you. But you have to just know my shell. My address. My-- Guest: Your shell. Yes. Russ: I tell you that; and you send it to me. Guest: Starting information. Russ: It's all in the blockchain. Guest: Nah--it's all--it's all in the blockchain and you can very safely broadcast to everybody you want, the public bitcoin address--there's no harm in that. Russ: But nobody knows--if I--let me ask a clarifying question about anonymity first. Nobody knows my address unless I tell them. Correct? Guest: Correct. Yeah. Russ: Nobody can read the blockchain and know where Wences Casares's house is. Guest: Correct. Russ: It's all anonymous. Correct? Guest: Correct. Not anonymous. I would say it's selvonymous[?]-- Russ: It's what? Guest: Selvonymous[?]. Because anonymous would be that you don't know anything. Russ: Correct. Guest: Actually, someone will go to a blockchain and will see that one address that belongs to me; but they don't know that--they will see that one address gave another address 100 bitcoin. That's all they'll see. They don't know that one address is one--[?] one address is Russ. Anonymous would be that they can't see any of this. Right? Russ: Correct. Guest: But here there are hundreds of identifiers for both of them. And it's not written there in the blockchain who is each one of them. Russ: But when I ask you for 100, from now on you know my--you know Russ Roberts's address. Now, I could have--I could have painted your house wearing a mask. And you literally wouldn't know who I was. We could have transacted for something over the Internet and we would be literally anonymous. But we are not anonymous, in this story that I'm telling exactly, because now you know Russ Roberts's address. So you send him 100 bitcoin. And now I decide I want to use it. I want to give it to somebody else, or I need to use my private key. And I forget it. I can't remember it. Go on. Right? I can't get that 100 back. Ever. Guest: No. Russ: So, there's some bitcoin--so we we're actually going to end up with less than 21 million bitcoin? In circulation? Guest: Correct. Russ: Because some will be dissipated through--God forbid, I'm run over by a car or--then there's no estate to be--it's gone. Totally gone. So, I need a backup. Probably. Right. So what do I do? Guest: At the very least. Russ: So, right now I can write it down on a little piece of paper. That means that if somebody breaks into my house and gets my little piece of paper, they can steal all my bitcoin. Guest: It would be the equivalent of you keeping all of your savings at home. Russ: Correct. Guest: Some people may be wired to do that, but most people they would be ill-advised[?] to advise them to do that. Russ: Correct. Guest: Because no matter when you keep them, they are at risk. And you say, I'm going to keep them underground; in a safe-- Russ: Safe deposit box, in a vault-- Guest: Most people rather let a third party do that for them. Russ: Correct. Guest: So, unless you really know what you are doing, safekeeping private keys is tricky, because people can break into them, because you can lose them, because they can be stolen, because you can lose them.
31:10Russ: So, let's talk about stealing for a minute. What a lot of people do with their passwords--if you are my father--he's 85--you write it down on a piece of paper. Which is not ideal. Maybe it's better though than what other people do, which is what he also does: he writes it in his computer. If you put it in your computer, you make it hackable. Correct? [?] Guest: [?] What you want to understand is that this is the first time ever in the history of computers that you have a digital piece of information, 64 characters, that are worth money. Russ: Correct. Guest: It is money. Russ: Yes. It's a wallet. It's like finding a cash wallet in the street. Guest: It's like finding cash. Russ: Yeah. Guest: Digitally. Right? And this is a concept that is hard to understand. But it is cash. Before, since there was no digital cash, there was just something pointing to cash that was somewhere else. Right? Like looking at a mirror: you were never really looking at the real cash. And you are pointing at, the cash was in some bank or in paper or in credit card; but it was never the real cash. This is the real cash. So there is a lot of incentives for people, for bad people, to go and get those golds because they can run away with the cash. So you have to really protect them. Russ: And the way I protect--the way I protect my passwords is I have codes on my computer that remind me of the things. So, for example, if my password was 'Wences', I wouldn't put 'Wences'. I would put 'the guy on Woodside'--we're on Woodside Rd. here in California recording this; and it would remind me that it was you. I might try your last name first; I might have to poke around a little bit. But eventually I would remember it. When I have the 64-digit number, I can't really create that kind--you could. There are people who can remember 64 digits. They have schemes to help them do it. So one of the challenges of Bitcoin is securing that key. Now, we haven't been so good at that, so far. So, talk about Mt. Gox. What went wrong there? What did they do incorrectly that allowed people to lose all their money, basically overnight? Guest: Mt. Gox was a company that provided Bitcoin services. In the Mt. Gox story, there was nothing wrong with bitcoin itself. It was things that went wrong because Mt. Gox did them wrong. We don't yet know if it was a case of theft, where some third party stole the bitcoin from them, or fraud, where they-- Russ: Yeah. Guest: We don't know. It doesn't really matter, but it would be nice to know. Basically, they lost almost a million bitcoin of their costumers[?]. And they are lost for good, forever, because they didn't do a good job of protecting those private keys. And I think it created an immense awareness about how important it is to really put a lot of effort into how the private keys are protected. Russ: And customers mistakenly trusted Mt. Gox with those private keys, essentially in established the equivalent of, say, a brokerage account, which gave people access to move money in and out. Right? Guest: Correct.
34:39Russ: One question before I forget--I've always wondered. If I'm going to buy something from you via bitcoin--I'm one of these people with a smartphone who is going to change the world and--let's just use Amazon as an example. Amazon does not take bitcoin yet. But let's say they did. So I get on Amazon; I order the item. And I push a button which says I give Amazon permission--I want to send 100 bitcoin to Amazon. And then they don't send me the item. They get the deal; they get the coins, because once it's gone, it's gone. It's over. But they don't give me the item. What's my recourse? You have full recourse; it doesn't matter how you pay. It's Amazon and they will honor it. It's like if I go to Target and I buy something with cash. And I get home and it's defective or somehow I'm not happy with it. I just go back to Target and they will give me a new one or refund me. Russ: Correct. Guest: It's exactly the same. Russ: But in the case of--let me take e-bay, where I am using a 3rd party such as PayPal or Visa to make my payment, I go to Visa and I say, Hey, this guy--it's just a purchase[process?], it's not a merchant with a brand and a reputation; this person doesn't care, in fact that person is anonymous, is going to run away and not pay a price for this. So I go to PayPal and I said that person never sent the item. Or e-bay. Guest: In this case, you cannot do that with bitcoin. It's like paying with cash. Russ: It's like meeting a guy on a street corner. I pay him the cash, and he disappears and he tells me where he lives, but when I show up at the house there's nothing there. Guest: But that's why you will buy at places that you trust, like Amazon. Or, if you are going in a marketplace you are going to look at the reviews of the person who is sending, if he has good reviews and people are not complaining, you are not going to have a problem. Russ: Because one of the fascinating things to me about Silk Road, which was the online marketplace that involved a lot of illegal activity--people trusted people who were doing things that were illegal, where you couldn't go to the police or the court and say this guy didn't--but I get it emerged. Some kind of reputational mechanism was used on there to make that happen. One last technical thing, and then I think we're going to move to Xapo. There's different denominations of bitcoin. I didn't realize this until recently. So when I signed up for Xapo, I got a gift or a starting amount in my wallet of 50 bits. How much is a bit? Guest: A bit is--there's a million bits in a bitcoin. Russ: So I got one millionth of a bitcoin. There's another term--a Satoshi. Is this a real thing? A hundred millionth of a bitcoin? Guest: Yes. So, yes. That's the smallest unit. So, bit is a hundred Satoshi. And we like bits because they are like dollars. They have two decimals. Because you have one bit, comma, zero, zero, because a hundred Satoshis are one bit. Russ: And that right now is the minimum. Could somebody change that? Guest: That could be changed. Russ: How would that be changed? Guest: Convention. Agreement. You are not really changing the value in that case. Russ: No, it's just an accounting mechanism. But I think someone misunderstand--which I found fascinating as an economist--they say, 'Well, if there are only 21 million, we're going to need more than that.' And the answer is: You don't. Explain why. Guest: You don't, because there's actually 21 million bitcoins, there's actually 21--zillion--Satoshis. So-- Russ: And if you needed more, you could make it. Guest: I believe that there is a nontrivial chance that Bitcoin fails. I may be the most biased Bitcoin guy you can find, probably [?] you can find. And even then I think there's a nontrivial chance, maybe more than 20% that Bitcoin fails: in which case it's value will go to zero. So, nobody should own any amount of bitcoin they cannot afford to lose. Because it can go to zero. So it's very, very risky to own and [?] you cannot afford to, because it is incredibly volatile. It will remain incredibly volatile for many years. And there is a nontrivial chance that it goes to zero. I happen to believe that there's more than 50% chance that Bitcoin succeeds; and if Bitcoin succeeds, I believe that a bitcoin is going to be worth more than a million dollars. I believe that some time in the next 10 years, one bitcoin is going to be worth more than a million dollars. So, just like it would be very, very irresponsible to own an amount of bitcoin that you cannot afford to lose, it would also be silly not to own a little bit of bitcoin. To put more than 1% of your savings in bitcoin. Because if I am wrong, your downside is cut at 1% to hurt you very much. So, let's say that your savings are $100,000. So, what I would say is you should have $1000 in bitcoin. Russ: That's 4 bitcoins, roughly. At current prices. Guest: If I am wrong, Russ will lose 1% of $100,000, $1000--it shouldn't affect you much. Russ: It's not life-changing. Guest: You will complain to Wences anyhow but it's not like you want to kill me or anything. It's not too bad. If I am right, those 4 bitcoins will be $4 million. Which is 40 times your entire savings. So it's not like you will say I wish I had more. You bought plenty. So it's asymmetrical that to have a little makes sense. Do not have enough bitcoin that you cannot afford to lose, but have a little bit. Russ: I hope for those listening at home this rivals Gary Taubes's episode that got a lot of people to stop eating carbohydrates and consume more protein. This could be as life-changing. I wish EconTalk, the economics knowledge was more practical. But this is practical. It's a very interesting way to think about it.
40:51Guest: In regard to what you said the limitation of [?], something that economists in particular get wrong about Bitcoin--Bitcoin was not designed to be the currency of a country. It was designed to be private money, of private individuals, by individuals for individuals. And if you are an individual, you prefer a currency that appreciates, versus a currency that depreciates. Right? If you are rational then you say what do you want to keep all your savings in--something that loses value or you want to keep all your savings in something that increases in value? Most rational people will choose something that increases in value, that appreciates other than is deflationary. Bitcoin should never be used by a country as its national currency. It would be crazy, I think, because it just gives up all ability to control the currency in any way. Russ: [?] Guest: Imagine [?] that some country had a lot of bitcoin a couple of years ago--it was $5 a bitcoin. Then someone would be making $50,000 a year, you would be making $10,000 bitcoin a year; and right now that country would be immensely [?] wouldn't be able to compete, right, because they are [?] need to be $2 million a year. So it would be suicide for a country to eliminate their currency and switch for bitcoin. But these currencies--Bitcoin is not a currency for a country. It's a currency for private people. I think that when Bitcoin succeeds, it will become the currency of the Internet. Today the Internet does not have a native currency. And it needs it. Because when we are transacting on the Internet we are using currencies that are foreign to the Internet, like the dollar or like the euro or the yen. They don't--it's like trying to have a pig fly--doesn't really fly very well. Same thing. Non-digital currencies don't perform well on the Internet. But in becoming the currency of the Internet it will also likely become a global currency, a meta-currency, against which all currencies can be exchanged. So if someone in China is conducting commerce with someone in Kenya, they don't need to use--today they are using the dollar, which is neither one of their currencies and it doesn't make any sense. All of those things probably have to occur in bitcoin eventually and a lot of [?] sections will have to have it. Russ: Yeah. The other thing I think economists don't understand is they think deflation is inherently bad. And deflation is not inherently bad if it's expected. If people know that was what was happening, I think they'd think it would be a good thing. The other point I think to make is that although it may not be any nation's currency, it puts competitive pressure on countries to treat their currency maybe better than they have in the past because there's a chance for citizens to exit. Guest: So, when I was growing up in Argentina, and I saw my family lose everything a few times, basically the government was taking advantage of the poor, who didn't have an alternative, what to do-- Russ: Correct. It's like their school system. Guest: Exactly. Russ: Sorry. Cheap shot. Go ahead. Guest: But if your life was in cash and you had Argentine pesos they are almost taking advantage that you didn't really have much to do with that. If now anyone with a cell phone has an alternative, it will force those countries to be more responsible with their currency. Because people have an alternative and they will say 'If you want me to hold your currency, if you want me to hold pesos, you'd better make it attractive, be responsible, because if it's not attractive I'm going to sell them and get something else that you don't control. [?] Russ: Yeah; it limits the ability of the government to exploit through money creation. That would be a good thing.
44:25Russ: So, let's talk about Xapo. Tell me what service it's trying to provide that's not available right now. Guest: We look at the biggest obstacles that people have to use bitcoin and focus on those. Xapo is like a Bitcoin bank. If you have dollars, you may keep them in a place like Bank of America. If you have bitcoin you need to keep them somewhere, and those are the services we provide. And we give you an account that looks like a bank account but for bitcoin, where you can keep your bitcoin, you can receive bitcoin, you can send bitcoin, you can buy bitcoin. Russ: But in theory I don't need a bank. Guest: It's different from a bank in a very important way, which is, when you put $100 in Bank of America, you are really giving that money to Bank of America and it is in their balance sheet. And then they turn around and they do things that you may or may not know with it. Russ: Yeah. Guest: When you give us $100 bitcoin, it's very, very different in that that is not in our balance sheet. We do not own it. We just safekeep those bitcoin for you. So, it's equivalent to--we look like a big parking garage, a big building that is a parking garage. The parking garage structure is ours. You bring your car and you park it there. The car is yours. We cannot use it, touch it, lease it, sell it, anything. It's not ours. We just provide the parking garage structure. Russ: So the question then is, why don't I park it in my own garage? Why do I need a third party to park my car? Because part of the appeal of bitcoin is I don't need this third party. So, all of a sudden-- Guest: Okay, I agree with that, friend; I don't want to offend you, so I am going to use my mom as an example. I trust my mom. Maybe more than I trust most people. But I do not trust my mom to keep her private key safe. That requires quite a lot of know-how and expertise. And I would be irresponsible if I told my mom, 'Yeah, sure, get some bitcoin and you take care of the security of those bitcoin.' That would be highly irresponsible. Just like you would be highly irresponsible to tell your mom, 'Keep all your savings at home under the mattress.' Russ: Then she'll know where it is. Guest: Huh? Russ: Because you'll know where it is. But it's dangerous. Guest: And some other people may, too. So it's dangerous. What we do is make it invisible for people. So, we want you to have certainty that these bitcoin are yours. We're just safekeeping them. So it's not like putting them at risk like you would in a bank. But we really go to extraordinary length to make sure that those bitcoin are safe. Things that for most individuals and institutions are sort of unthinkable to do on their own. Russ: Okay, we're going to talk about that. But first I want to ask--at risk of asking an embarrassing question: It reminds me a little bit of America Online (AOL). So, you don't know how to get on the Internet but we have this easy way. So there's really two things that you're trying to provide. One is: I'm not a technical guy. I don't want to read the bitcoin paper; I don't want to figure out how to establish my own account. You're going to make that effortless for me. Guest: Yep. Russ: The second part, though, is you are going to try to make it easy for me to sleep well at night. But the question then is, how do I--to turn the tables on you--if you were my mom, I'd feel good about--and you were really smart about cryptography and keys, I'd say, well, my mom's taking care of it; I don't have to worry about it. Xapo is not my mom. So, how do I know that Xapo is not Mt. Gox? How do I know you are taking care of my money in a way I can rely on and what are you doing that's different? Guest: So there are many, many ways in which you can do that. We have a few accounts that hold more than $50 million dollars worth of bitcoin with us. All of those clients will send teams to do due diligence of Xapo that includes financial due diligence and legal due diligence, physical security and cyber security, right? As you would if you were to put $50 million with anyone. And every single [?] we have one of those due diligence. Bank to us [?] the account, that's why the largest owners of bitcoin all use Xapo, and that's what has made Xapo the largest custodian of bitcoin in the world. But that's one indicator. And another one is if you look at who our investors are, you have some of the best investors in Silicon Valley--Benchmark, Reid Hoffman from Greylock and LinkedIn, Index Ventures, Rivet, Fortress. Russ: And I would suggest that the reason they invested that money is that they know you. Guest: They know that we are serious. They know that we've done this before, that we are professionals, that we know finance, that we know security. Our Board of Advisers is composed of Dee Hock, who was the founder of VISA, John Reed, who was the Chairman of Citibank, and Larry Summers, who was the Secretary of the Treasury. If it's your mom, those names should give her comfort that we're here for the long run, what we're doing, we really want to make sure that your bitcoins are safe.
49:59Russ: But you also--that's all talk. It's nice. But let's say I'm doing the due diligence: I don't have 100 bitcoin--I've got 100,000. What am I going to see when I come to Xapo to do that due diligence? Let's talk about the physical side, because what you're doing there is extremely unusual. Guest: So, what we do is, we keep the private keys of the bitcoin that we do custody for in outlying servers. These outlying servers have never been online and will never be online. And that's important because it means that nobody has had ever a chance to see them or fingerprint them in any way to try to guess how these bitcoin may be created or stored, their private keys. So these are outlying servers that are not online and have never been online. Those servers are inside a vault, a bit vault. That vault is deep underground. Our main vault is in a military bunker in the Swiss Alps, in Switzerland. And we have distributed keys in 5 continents. So if someone wanted to steal your private key, and if your bitcoins are in Xapo and someone wants to steal your private key, they need to physically break into a bunker and then into the vault, in 3 different continents at the same time. Which is hard to do. Russ: So then the next question would be the fraud--not necessarily fraud, but you have employees who are guarding the bunker. What keeps them from stealing the--? Guest: There are systems that are also audited that make it so that not only if you have one but more rogue employees that is not enough-- Russ: A conspiracy-- Guest: Yeah, for them to run away with the bitcoin. So, the people who have access to those locations are very, very limited. There's many doors inside the bank to get to these vaults. Each one has biometric verification. All of this is being filmed. And again is a very short list of people who can do that; each banker, all of those are different people, they do not know each other even though the system makes it so that even if they were to contact each other they cannot collude. Russ: So, the irony is, we have a currency that is magnificent because it has low transactions costs. So, right now, even if you have a credit card, there's a fee, because there's a potential for fraud. The big advantage of bitcoin is that when I have it, I know that you sent it to me. I don't have to worry that you stole somebody's credit card, I'll have to refund it when it gets called back, etc., etc. And yet now there's these additional transactions costs, of course. So the question is: How large are they going to be? These are very expensive physical costs, to create a digital frictionless currency. Guest: Depends on how you look at it, Russ, because all of these, of course it's very expensive to build, but it's very cheap to run. Whether we process one transaction a day or a hundred million transactions a day, the cost is the same--meaning the marginal transactions cost is close to zero. Russ: You don't have to build a bigger bunker. Because just the server has got a lot of space. Guest: Yeah. So effectively quite efficient [?]. It's not really costly per transaction. Russ: And what will be--your costs then per transaction are going to fall over time. So, right now, what do you charge to protect bitcoin? Guest: It's all free. Russ: Right now. Guest: And will always be free. Russ: How do you make your money? Guest: We make money when people ask us to buy bitcoin for them. We charge them 1%. When people ask us to sell bitcoin for them, we charge 1%. And we issue a debit card that can be used anywhere credit cards are accepted. It's free to the user, just like using your debit card--your bank debit card is free to you but the margin pays us a little every time [?]. Russ: So, right now, to go back to the fee, the 1%, that's for buying and selling in a particular currency. But if I'm transferring bitcoin, it's still zero? Guest: Yes. Russ: Okay. And you've recently--how old is Xapo? Guest: It's about 2 years old. Russ: And you recently, to a lot of fanfare got a second $20 million investment? Guest: We've raised a total of $41 million. Russ: And when did that come in? That second one? Guest: The second one in July of last year. Russ: Okay. So about a year ago. And, are you done? If you can talk about it? Guest: Yeah. Russ: You think you are good, going forward? Guest: Yeah. That was more capital than we were looking for. Russ: So, you're good.
54:41Russ: So, what's going to happen? What do you think is going to happen? You give us a forecast about--let me ask it differently. You said there's a chance Bitcoin will succeed, will be worth a lot of money in American, regular currency; there's a chance it will be worth zero--total failure. How will I know that it's successful? What will be a sign? I could say, 'Well, it's successful now. Somebody gave Wences Casares $40 million dollars, that's a pretty sign of success. You've got a vault in the Swiss Alps. I think we're good.' Guest: I think it would be successful when we see more than 200 million people owning bitcoin. And I see many different ways that get us there. It may happen in 5 years or it may happen in 20 years. But I can see different ways that can get us there. Russ: Give me a flavor of them. Guest: I think that the most likely one is a very boring one in which nothing new happens. Russ: Slowly accumulate. Guest: We got from 0 to 13 million owners of bitcoin in 6 years. With no killer app. It's just, everybody tells everybody, every new--if you own some bitcoin I can guarantee that affected more than one person without meaning to. And that's true for everybody who has bitcoin. That keeps growing. So that very boring--everybody in Silicon Valley and [?] is waiting for the killer app. And I think that there's a way to get there without a killer app, just like we got to 13 million people without a killer app. It's going to keep growing organically to 200 million. That's one path. I see a real demand in emerging markets, where billions of people have smart phones but they cannot transact online. So, that's another way to get there. Or imagine a world in which, 5 years from now we are 200 million kids under 25, have $0-$10 in bitcoin because they use it for online gaming. It's only a matter of time before we realize, like, hey, I should offer things to these kids because that's very easy for them to transact to pay me with. There are many ways we get there. And I think time. But it's going to get there. Russ: Do you think we'll find out who Satoshi Nakamoto is? Guest: I think he doesn't want us to. I hope we don't. If he doesn't want it to be known, he deserves that privacy. And we owe him all a lot. At least we can give him his wish. Russ: I agree with that. Do you want to speculate on why? I can't think of a similar experience in human history where someone created something extraordinary and didn't take credit for it. Guest: Yeah. I think whenever someone tells you why Satoshi disappears, some people will tell you that it's because he's afraid of government. Other people will tell you that's because he wants to run away with money he has. I think whenever people tell you why Satoshi disappeared, it's more telling of the person talking to you and their own fears than Satoshi. If you just read everything Satoshi wrote, and especially the code he wrote--and it's obvious that he was very obsessed with robustness--he made some calls that nobody makes today in technology or in finance. Whenever there was a fork in the road in front of Satoshi, and something led to more efficiency and the other one led to more robustness, he always chose toward robustness. To a ridiculous degree. The mining arrangement is one example: How do you calculate the balance of the bitcoin [?] is another example. But plenty of examples, how obsessed he was with robustness. And a system with a father is, I think, Wikileaks, it's a lot less robust than a system without a father. I think TCP/IP[Transmission Control Protocol/Internet Protocol]. Right? So-- Russ: Let's--what's the second one? Guest: The protocol that powers the Internet, TCP/IP. Russ: Yeah, yeah. Guest: So, if Wikileaks would have been more powerful, if it didn't have a father--because a lot of people associate Wikileaks with Julian Assange and some people may not like his hair and therefore they won't trust it--I mean, it's a pity. If I have to buy something, if I have to fork out money for something, and every time I am forking out money I was thinking of a particular person, it's like I'm trusting that person. It's a lot more powerful to have something that is fatherless. And I think that's why Satoshi did it. And it makes sense. It takes immense discipline and a very, very unique kind of character, strength of character to imagine that this changes the world like I think it will. More than the Internet. Imagine that Satoshi is old 40 years from now and his grandkids come and say, 'Hey, Grandpa, what did you do with your life?' And he will say, 'Oh, I was just a humble university professional.' Or whatever he is. That's incredible. Russ: But that would be unusual because there are not that many that are humble. Yeah, go ahead. Yeah. Guest: You know what I mean. It would be--it's remarkable what he's done. And I think he did it for the better of--I think Bitcoin is more robust because the creator or the creators gave up the [?]. Russ: But I interrupted you. So, when, 40 years from now--what were you going to say? Guest: Imagine that 40 years from now, Satoshi's grandkids ask Satoshi, 'Hey, Grandpa, what did you do with your professional life? What was your contribution to this world?' He actually changed the world; but he would only tell his Grandkids, 'You know, I was just a humble university professor', or whatever it is. That requires immense strength of character. Russ: So you are saying that might be the end of the story. It will go to his grave, and whatever-- Guest: If that's what he wants, he deserves it and he is remarkable. If he wants to come out and take the credit, he also deserves that. But it's whatever he wants. Although he may not.

COMMENTS (40 to date)
Steve Bacharach writes:

So I thought I'd take a look at Xapo after hearing this podcast. Opening an account was easy, but the only option for buying bitcoin is to do an International Money Transfer in Euros. This seemed to be confirmed by customer service - unless they totally misunderstood my query. This seems like a severe limitation.

I enjoyed the podcast but I thought it might be useful for listeners to hear a little about the actual process of getting started with Xapo.

dan writes:

Good clarifying discussion that convinced me [ironically] that Bitcoin won't be the world's digital currency:

1. "Nobody controls Bitcoin"

- has anyone tried to control bitcoins yet? Not for financial gains since 21 mil x $300 = $6B, hardly an amount worth the effort, given that control means loss of credibility followed by a collapse of value.

2. "Never more than 21 mil bitcoins"

- let's say another group of 100 mil people want Bitcoin-2, an identical currency in every respect within a separate ecosystem. Now we have 42 mil bitcoin-equivalents that must trade at parity since they are identical - hence inflation. And what about bitcoin credit and derivatives? The banking system is what kills the dollar value, not the dollars in circulation.

3. "Free to send them to anyone for free"

- that is until governments decide in their pretty heads that "only criminals use bitcoins" and make bitcoin illegal. Would you pay the additional transaction costs (including possible jail time) or would you abandon bitcoins in favor of Gold, Dollars, Euros, Fine Art, etc? It's all anonymous you say? No, nothing is anonymous on the internet. You can always be traced.

Tal writes:

Steve: if you want to buy Bitcoin with US Dollars, I suggest using Coinbase. They're similar to Xapo, and have raised 5x as much money as Xapo from two of the top VC firms (Andreessen Horowitz and Union Square Ventures). You can easily link your checking account or credit card to the service to start buying.

Dan: Bitcoin2 units would not trade at parity because they wouldn't be identical. It would be a separate network. If you tried to make a Bitcoin2 network, no one would care about it and your bitcoin2 coins would be worth nothing. If you were correct, someone would have done what you're suggesting many times over, and Bitcoin's price would already have been driven to 0.

Lew Zaretzki writes:

Yet another great Econtalk- thanks to all who participated to put this together.

Daniel Fullmer writes:

There was a missed opportunity to explain multi-signature transactions and the use cases they enable. Multi-sig transactions allow you to split the key associated with an address into multiple parts. Say, for example, 3. In order to spend the bitcoin in the address, at least 2 of the 3 keys must sign the transaction for the bitcoin to be sent. This is just an example. More generally, this type of transaction this can be done with M of N keys, where M <= N. This enables some more advanced features like multisig wallets for additional security (see, as well as escrow for buyer-seller dispute resolution.

Christian writes:

Two stupid but honest questions:

1. If I open an account at Xapo or Coinbase or wherever, haven't I just traded my very secure but unwieldy Bitcoin key for my convenient but insecure account password? Don't I run into all the password problems I have with other accounts (lost, stolen, hacked, etc.)?

2. Once all 21 million Bitcoins have been mined, what incentive is there for anyone to keep processing the transactions? It seems like the transaction chain is ever-growing, and processing power is costly. Why devote servers and electricity costs to confirming transactions when the "lottery" is over and there are no more lottery tickets to "buy?"

nickik writes:

[Comment removed pending confirmation of email address. Email the to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Bob Mocadlo writes:

There are ways to help make bitcoin transfers more anonymous: bitcoin tumblers allow for bitcoin to be "laundered" by filtering them through multiple accounts, for instance.

lloydfour writes:

Gold has been dropping for the past year. Bitcoin's price has been dropping too. If Bitcoin is a store of value, why would the price of Bitcoin go up?

Michael Byrnes writes:

Tal wrote:

Bitcoin2 units would not trade at parity because they wouldn't be identical. It would be a separate network. If you tried to make a Bitcoin2 network, no one would care about it and your bitcoin2 coins would be worth nothing. If you were correct, someone would have done what you're suggesting many times over, and Bitcoin's price would already have been driven to 0.

All this means is that it is not trivially easy to set up Bitcoin2. I don't think it is any sort of guarantee that bitcoin is now and forever immune to competition.

Bitcoin was designed by a human being (or several). I think Casares was correct that it has taken on a kind of life, but I don't think that's any kind of guarantee.

Bitcoin has some value because of network effects that would not be there for Bitcoin2, at least not from the outset. But mySpace and Livejournal had some value from network effects that Facebook didn't have - and yet Facebook won.

I think it would be great if Russ did an interview with someone who is not so sanguine on Bitcoin. Not so much an outright skeptic, but maybe sort of a Bitcoin "lukewarmer".

Tal writes:

Christian: When you buy bitcoins via Coinbase (or Xapo), you'll initially have them in your Coinbase account and you're right that they'll be protected by just your Coinbase password (and 2 factor authentication if you enable it). However from your Coinbase account you can then send the coins to a Bitcoin address that you've generated on your own, and whose private key only you have.

Wences was slightly misleading when he said transactions were free. Currently if you send transactions without fees they'll eventually be processed, but if you want them to be processed in the next block you generally have to add about 10 cents of fees. In addition to the 25 new bitcoins per block, whoever wins the lottery also gets all the transaction fees for any transactions they include in their block. So the idea is that in the future when Bitcoin is more popular, transaction fees will sum up to an amount that incentivizes enough processing power to protect the network. Whether transaction fees will actually be enough to protect the network is a highly debated topic in the Bitcoin community.

Michael: I agree that Bitcoin is not immune from competition. However any new cryptocurrency will need to offer some sort of innovation large enough to overcome Bitcoin's network effect in order to succeed. There are hundreds of near-clones of Bitcoin out there right now, made by people hoping to profit by duplicating Bitcoin's success, but they're not highly valued because they don't add anything new.

Bill Coats writes:

Great podcast. Thank you.
How will Bitcoin process transfers after all 21 million coins have been mined? What incentive will there be to use processing power to verify transfers?

Buzz writes:

Once all 21M bitcoins are mined, processors will be incentivised by the fees included in the transactions. So you say: "I want to transfer N bitcoins from address A to B, and willing to pay M bitcoins to whoever processes it".

Buzz writes:

Anyone else chuckle when he said that a Bitcoin will be worth $1M with more than 50% certainty ? That'd mean over 10% of global net worth is BC.

Syfaka writes:

Before Bitcoin becomes a widely used currency, the system architects have to (somewhat urgently) address pretty serious scaling and marginal cost problems.

I recently found this blog post by Gavin Andresen (, proposing the 20-fold increase in the standard size of blocks. This is apparently required to prevent the imminent overload of the current capacity of the mining network. Needless to say that his post is causing a lot of controversy in the Bitcoin society, with many questions asked about compatibility issues between 2 parallel Bitcoin processing systems and the costs associated with processing larger blocks.

Internet services are all about scalability and near zero marginal costs; there’s little else behind Bitcoin, if it fails to demonstrate these 2 “virtues”.

Christian writes:

Tal: Thanks. The solution you suggest allows me to get Bitcoin easily, but still not store and use it in a way that's both reasonably secure and reasonably easy to use. I was hoping I was missing something that would resolve the conflict between security and ease of use.

I bet someone smarter than me could write a "translator" app that would take an input, perhaps remembered via a password method similar to the one Dr. Roberts mentioned (a disguised mnemonic), and translate that via some algorithm into the private key. So I could leave myself a reminder that only I understand but can easily remember and input…but someone else couldn't easily hack. A bad guy could decode the translation algorithm, but wouldn't easily be able to figure out either the input (the "answer" to my mnemonic) or the output (the key).

I suspect the transaction fees will become high enough to protect the network but that will dampen enthusiasm for Bitcoin.

I respectfully second Michael Byrnes' call for an episode with a Bitcoin skeptic or lukewarmer. The topic is fascinating so I'd like to learn more about it. Of course, maybe nobody's willing to go on record as being against it if it ever does go up to $1M per Bitcoin!

Luke J writes:

What if Russ Roberts is Satoshi Nakamoto? Like Mark Ruffalo in that bad magic movie.

Tal writes:

Christian: there are Bitcoin wallets that you can download which do make storing your own bitcoins not that difficult. See for a list of them. It's still not something I'd recommend for the average person. Basically the software encrypts the private key, and then you pick a password that will allow you to decrypt the private key. So you're still just using a password to be able to send/receive coins from your computer. The difference between that and your bank is that if you lose your password (or lose access to the copies of the encrypted private key), there's no one to help you and you'll never be able to access your coins. So most people keep backup copies on USB drives and/or pieces of paper.

Kevin Johnson writes:

@chrismalmo writes "According to my calculation, a single Bitcoin transaction uses roughly enough electricity to power 1.57 American households for a day." at

Wences's description of billions of people using bitcoin from their cell phones to conduct small transactions seems improbable and unwise if a single transaction uses anywhere near this much energy.

Michael Byrnes writes:
@chrismalmo writes "According to my calculation, a single Bitcoin transaction uses roughly enough electricity to power 1.57 American households for a day." at

Wences's description of billions of people using bitcoin from their cell phones to conduct small transactions seems improbable and unwise if a single transaction uses anywhere near this much energy.

At a glance, I'm skeptical of this. It just doesn't pass the smell test.

But at some level, so what? How many households could be powered for how many days on the energy used to power Christmas lights every winter? Or the production and screening of motion pictures? Or Facebook? Or the energy needed to process other electronic transactions?

Right now, the potential to get new Bitcoins is enough to keep people interested in processing those transactions. When there are no new Bitcoin to be had - or they require so much energy, I assume there will be some sort of "financial transactions tax" where the processors of each transaction get a small cut - with the size of the cut being whatever is needed to keep the network in use and functioning smoothly. (That's all speculation on my part but I would like to hear more about this.)

Michael Byrnes writes:

Buzz wrote:

Anyone else chuckle when he said that a Bitcoin will be worth $1M with more than 50% certainty ? That'd mean over 10% of global net worth is BC.

Yes, I don't see it. Bitcoin's only value (even if it succeeds wildly) will be as a claim on future resources and production. That's true for any money, even gold.

There must be some limit to how much production can be claimed via currency, right? If I somehow had all the world's gold (and controlled all the gold mines), I'd be rich beyond belief, but would I, in effect, "own the whole world"? I don't think so. I think my gold would amount to massive wealth but still only a very small claim relative to what the whole world had to offer. Thoughts?

Kevin Johnson writes:

@Michael Byrnes:
The article states "Bitcoin network constant power draw at just under 215 MW" and "about 110,000 transactions per day". (215M x 24 hours)/0.11M is about ~50KWh (kilowatt hours) per transaction.

This meandering bitcoin forum discussion from October estimates 250,000kWh at 3k txns = 83KWh per transaction:

The average US residential customer uses about 30KWh/day per

The current cost per Bitcoin transaction is $8 per . At a power cost in China of 3-6 cents per KWh, 50KWh per tx gives a power cost of $1.50 to $3.00 per tx, which at least isn't prohibitive.

Tal writes:

Michael and Kevin: the idea of that power cost being "per tx" is misleading. The power cost of including more transactions is always negligible. The main power cost comes from the proof of work system, which is independent of transactions. So if Bitcoin's transaction volume increased 100x, it would have no significant effect on the network's power consumption. The "power used per tx" numbers look high now just because there aren't a lot of transactions happening yet.

Daniel Barkalow writes:

One thing that's worth thinking about with respect to bitcoin is that when the exchange rate between dollars and euros changes, people in neither Germany nor the US drastically change their prices to reflect some sort of true value of their goods independent of the local currency. People generally list their prices in some particular currency, and are slow to react to changes in the value of that currency relative to other currencies, which is possible because they're mostly exposed to the value of the currency relative to the seller's costs, which are mostly prices listed in the same currency.

I think you'll be able to tell that bitcoin has really succeeded as a currency when someone lists the price of a computer as some number of bitcoins, and doesn't change that price based directly on an exchange rate.

Ken Simpson writes:

Care should be taken when telling the world that each bitcoin will be worth $1M. If speculators were to hoard bitcoin, there would be few transactions, and the whole system would collapse, making them worthless.

Of course, before they became worthless, speculators would unload them. So, an equilibrium would evolve somewhere in between.

Instead of encouraging speculators, the bitcoin world needs to encourage users. A robust system is a prerequisite to its success.

dullgeek writes:

So what happens to the incentive to process the blockchain after all 21 million bitcoins have been produced? Right now the blockchain is maintained by many people competing for the 25 bitcoin reward. When the reward goes away, fewer people will maintain the blockchain. Will that number be small enough that it'd suddenly become possible for a well funded organization to hold a majority vote that could change bitcoin?

Michael Byrnes writes:

@ dullgeek

I would assume, though I'm far from an expert, that some sort of transaction fee will be implemented when it becomes necessary for the processing of transactions.

caseysnhan writes:

+1 request for bitcoin skeptic show.

still not sure of the best method for a basic investor.. coinbase vs. xap vs. other.

also for those interested in xapo, this does seem to be a bit of a red flag.

Lauren writes:

I believe I can confirm to Luke J. with confidence and without outing Russ in any way that he's not Satoshi Nakamoto. Nice try, Luke!

There are a couple of tidbits I'd like to toss into the ring, though, about Satoshi Nakamoto and the secrecy surrounding his identity.

One hypothesis I've not seen mentioned online but that would go far to explain both someone's initially concealing his identity and then continuing to not reveal himself is that there may be prior contracts involved.

For example, if you work for a high-tech company--be it large and established, or small and startup--you probably have a signed confidentiality agreement and an agreement that any tech ideas you come up with while employed that are related to your work belong to the company, not to you. That company could be the government (U.S. or another government); or a semi-private agency under contract to produce research confidentially for that government or agency; or just a private company with a standard nondisclosure agreement or ownership agreement such as a university or a Silicon Valley/Seattle-based type tech company.

So, the incentive to hide your identity when introducing an idea such as that of Bitcoin may be that you do not want the company/agency/government/subcontractor you work for contractually to own the idea. In part, that may be because of the irony that the idea itself emphasizes its inherent non-ownership. Whether or not Satoshi Nakamoto is one person or a group of people, or writing under a pseudonym, or otherwise reticent about his identity, no one could think he's naive about working out the various positive or negative implications for his own situation of his publishing his work under his own name.

Jerm writes:

Been thinking about this episode for a few days. And it seems that the more I learn about Bitcoin, the less likely it seems like it'll ever be the true world currency (or even A world currency).

The hard cap of 21 million bitcoins should keep this from ever becoming more than a novelty. If each bitcoin was valued at $1M, then the average (global) household would have...0.01 bitcoins of wealth? The average worker would earn 0.0001 bitcoins in wages a week? Does that mean a union organizer would be trying to convince them that they are worth 0.00014 bitcoins a week? A futuristic version of the Blues Brothers would travel all over Chicago to raise 0.005 bitcoins? It seems like it would require math that a large percentage of the global population just cannot do.

Also, the hard cap of 21 million bitcoins provides a great incentive for something like "Bitcoin2". Even now, there are probably a large number of people whose first exposure to cryptocurrency is through a bitcoin knockoff. And if bitcoin isn't demonstratably "better" than Bitcoin2, then there's really no reason for the growing population of cryptocurrency users to choose original bitcoin. The world is a very big place, and it's possible for Bitcoin2 to take root in a place that doesn't believe in the superiority of original bitcoin. That's one of the reasons why there's a diversity of currency in today's world.

I also wonder what percentage of bitcoin is "dead", meaning that the owner has somehow lost the password (or died) and the coins can never be used again. Wouldn't it be possible to analyze the blockchain and see which coins are inactive and likely dead? Isn't the fate of all bitcoins to someday be lost or forgotten? And if they are never replaced (or become the property of the Nazi gold), then how can the rest of them be considered a viable currency.

As bitcoin has increasingly appeared as a topic on EconTalk, I'm becoming more and more interested in becoming a bitcoin thief. If I see a string of 64 numbers written somewhere...what else could it be?

Eric Gartner writes:

One simple reason for Satoshi to remain anonymous is that he is estimated to own around a million bitcoins. Other people may threaten him in various ways to get their hands on those private keys.

I don't think that bitcoin hoarding in general is much of a problem. A substantial percentage of bitcoins are currently being hoarded, and the effects are not catastrophic. The number of bitcoins in circulation will always likely be far less than 21 million due to savers and lost private keys. And for the time being, it's still an inflationary currency. As I write this, the bitcoin market must absorb over $1 million per day just to stay at the same price. The fact that it's been able to do that recently shows how resilient the bitcoin economy is even in its current infant form.

Hoarding would have an effect if any movement is ever seen in the Satoshi accounts though. He has the ability to flood the market with a tremendous amount of bitcoin, and until there is some strong proof that he has destroyed the private keys, it must be assumed that he or his heirs will be able to disrupt the market.

There are a number of ways that bitcoin could fail, although most of the more facile concerns that are brought up by those not already knowledgable about bitcoin have already been well thought-out and answered by those in the bitcoin community. I think the biggest legitimate concern is that bitcoin has not yet found its "killer app" (unless you count Silk Road). Nothing about it at this moment would inspire most people to use it over dollars and credit in a normal purchasing situation. That is a situation that can change, but it hasn't changed yet.

There have been a tremendous number of "Bitcoin2s" already. They are called altcoins. Some altcoins even have significant and cool technological advantages over bitcoin. However, none of them have put a dent in BTC due to bitcoin's tremendous first mover advantage, the large number of people already innovating in the bitcoin space, and the fact that much of altcoin technological innovation can be backported into Bitcoin's design or built into third-party Bitcoin sidechains. Don't discount the strength of currency inertia... it may be responsible for a lot of the current value of the US dollar!

Warren writes:

Christian and Tal,

It is generally preferable to use hardware rather than software to store very secret information, such as the bitcoin private key or address. There are many such devices that attach to your laptop or PC such as Hardware is much more difficult to break into.

I don't know if they work with cell-phones. If not, they probably will in the future.

When you're not transacting with Bitcoin, you can detach the hardware keep it offline.

Aaron writes:

Great show, Russ! I love it when you do technology shows. Admittedly, I have been absolutely enamored with Bitcoin since I first heard of it in 2013.

I now receive 2% of my paycheck in bitcoin using Any money sent to their system via direct deposit will be converted to bitcoin and put in my bitcoin wallet the next day. It is simple and fast.

My first experience with Bitcoin was at SXSW in Austin Texas in March of 2013. I put $7 in a Bitcoin ATM with the help of the CEO of Bitpay. It was a great experience. I want to help others to try it out.

If you want to try bitcoin just download any one of these wallets: then put your address on twitter with the hashtag #econtalkrocks and I'll send you some bitcoin, halving each time. (First person will get $3, second will get $1.50, etc...)

Even if you never use the bitcoin and it gets burned at least you learned something and I had a fun time sharing.

Don't be scared. It's not the anti-christ. :)

[Shortened URL change to full URL. Please don't use shortened URLs on EconTalk. Our readers like to see where they are going.--Econlib Ed.]

Jerm writes:

By all of these accounts, it seems that bitcoin hoarding points to many problems. As to whether the magnitude of these problems are large or small, I guess it depends on the intention of the bitcoin user.

First, hoarding bitcoin will slow its acceptance as a legitimate currency. There will someday be 21 million bitcoin, and if a significant percentage of them sit on the sidelines, the day when Walmart/McDonalds/whoever accept bitcoin as payment will be postponed into the future, simply because bitcoin owners do not intend to use them as money.

If bitcoin requires $1M of "new money" a day in order to stabilize its value, those new users need to contain a very high percentage of non-hoarders in order to get it out of its infancy. Other cryptocurrencies can thrive BECAUSE bitcoin is being hoarded, and if a large percentage of bitcoin holders are speculative hoarders, then it's Beanie Babies all over again.

Secondly, if bitcoin hoarding make up a significant percentage of bitcoin usage, it's difficult to ever know the true value of a bitcoin. The current price includes a speculative premium (and a premium based on bitcoins use for illegal activity), and someone who does not want that headache should go elsewhere. And that means cash.

Eventually, the value of bitcoin will be the same for all people, bitcoin evangelists and those who will never use it. And after several bitcoin-themed episodes of EconTalk, there's still a lot of basic bitcoin dogma that is held tightly within "the bitcoin community". I never understood what the big deal was about Beanie Babies. And I feel like I'll be able to lead a full life without having to think twice about bitcoin.

ads writes:

There is an intriguing Catch-22 associated with Bitcoin. Menger's 1892 essay "On the origin of money" points out that the commodity which eventually becomes money does so because, inter alia, it is the easiest to sell, hence has the greatest capacity to bridge the coincidence of wants at the least risk and inconvenience to the holder. It is only when this commodity is generally acknowledged to be readily saleable and hence a reliable medium of exchange per se does it develop its store of value (and unit of account) functions.

Bitcoin afficionados appear to be putting the cart before the horse - they buy it for its supposed store-of-value function before its medium-of-exchange function has been properly established. As others point out, it can't be a currency if it doesn't circulate.

Hence the Catch-22: For Bitcoin to become a store of value, people must first stop seeing it predominantly as a store of value.

Matt writes:

I'm a bit behind on my podcasts, so just listened to this one. I have a few points that cause me to question general viability of bitcoin.

First is the swap from an inflationary currency to a deflationary currency. Once this happens (in 2140 I think?) don't people just hold onto bitcoins, as their intrinsic value is no longer as a medium of exchange but as an ever increasing store of value? This is especially true if other global currencies are still in use, you just continue to use your local currency to buy goods and services since it is inflationary and loses value over time, and hoard bitcoins since it is deflationary.

Second I'm not sure what convinces me as just a regular guy to trust code that I don't understand more than a central bank that I don't understand. Why trade in my dollars and pounds for bitcoins unless I view it speculatively?

Third - there are already systems in place and growing in third world economies for people without bank accounts - M-Pesa comes to mind - that solve many of the issues around security of cash, transaction costs, portability, etc... Why is Bitcoin a better solution here? It's probably a circular argument back to the trust thing and trusting bitcoin more than local currency, but that seems like a big leap even if the local currency is garbage.

Great podcast, as usual.

Joe Drouillard writes:

Feel Cheated by XAPO. I purchased one bitcoin through my new XAPO account. Over and above the quoted price, I got nailed by 27 Euros in fees by XAPO, and a $35 USD fee by my bank for wiring. 10 of the 27 Euro fee by XAPO was hidden. I did not find out about it until I found I had only received .969 of a bitcoin! Lesson learned.

Warren writes:


Since I am the least knowledgeable about economics on this site, I'll try answering first.

1. M-Pesa is a money transfer system, like Pay-Pal, not a money in itself.

2. If you look up the definition of money (in Wikipedia perhaps) you will find that the definition contains 3 elements, all at the same time. Money, by definition, is a) a method of account ( bookkeeping), b) a medium of exchange (currency), and c) a store of value. Until 1971 all there elements were at least technically true of our money, dollars. 1971 was when we went off the gold standard, the tiny bit of the standard still in place in theory.

3. Today our money inflates because our Federal Reserve System Board, (Our Central Bank), whose head is appointed by our President, and whose goals are set by our Gov't, purposively inflates it. Bitcoin is not run by anyone, so any inflation or deflation that occurs will be 'natural'. Some people say money will naturally deflate, probably because our money did deflate while we were on the fuller gold standard. That's good for us, it means prices go down.

4. Hording used to be called Saving. People used to save up the money to purchase something they wanted instead of borrowing the money. That way they avoided paying interest to the lender. If they didn't need to purchase something they would invest the saved money in something productive, like a business.

5. I don't trust our central bank or our Gov't at all. I'm not sure about trusting a crypto-currency but I'm sure about the bank and the Gov't, they have long track records.

6. It would be a GREAT big leap to completely trust bitcoin. So I won't. But I could just try it a little bit, and watch it like a hawk.

swernga writes:

Why isn't anybody commenting about the bitcoin bankruptcy and arrest in Japan?

Robert Ferrell writes:

The original bitcoin code seems like a lot for one person to generate. I wonder if "Satoshi Nakamoto" is similar to "Nicolas Bourbaki" - a pseudonym for a collective.

Also, how do we know that bitcoin wasn't generated by some organization with unknown motives? The NSA probably has the wherewithal. Don't know if they have the motive. I know people have pored over the code. Would it be obvious if there were some sort of back door? I don't understand bitcoin enough to know if anything like that is even possible, but I'm skeptical of claims that bitcoin is completely secure.

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