With Nolan Bauerle, Director of Research at CoinDesk
With the Bitcoin soaring to unbelievable heights, Steve invited Nolan Bauerle, Director of Research at CoinDesk, to get to the bottom of what’s behind the Bitcoin craze. But first, Steve wants to know more about Nolan’s firm, CoinDesk.
As Nolan explains it, CoinDesk is a media site that dedicated itself early on to the rise of the new asset class of cryptocurrencies, such as Bitcoin and its less successful competitors, and developed an inside track with deep industry relationships. CoinDesk also created the Bitcoin Price Index (BPI) which aggregates Bitcoin prices at credible exchanges and is now the de facto Bitcoin price quote worldwide.
Bitcoin Addresses Drawbacks In Fiat Currencies
Steve wants to understand what makes Bitcoin different from normal currencies. Nolan explains that fiat currencies, such as the dollar and the euro, are controlled by centralized entities, such as the Federal Reserve Bank, and can be politically influenced, are inherently inflationary in nature, and have no limit on how many can be printed, all of which exposes them to hyperinflation.
Bitcoin, on the other hand, is decentralized, not controlled by any entity or government, is not subject to inflation, and relies purely on market forces. Additionally, Bitcoin was designed so there will never be more than 21 million bitcoins in existence, giving it some of the features of the gold standard, to keep it from losing value.
The Falling Tree Analogy
Nolan says a Bitcoin’s value stems from the technology behind it, where millions of computers are independently aware of every Bitcoin transaction that takes place, making it easy to validate transactions and virtually impossible to counterfeit. Its value lies in being completely independent of political or governmental control and bias.
With Bitcoin, computer owners—known as Bitcoin miners—are selected by lottery and paid with Bitcoins to be part of the independent Bitcoin monitoring network.
Why The 21 Million Limit On The Number Of Bitcoins?
Today, there are 16.7 million Bitcoins in existence, trading at about $11,650 apiece. At its upper limit of 21 million Bitcoins, Steve estimates the total value of all Bitcoins at about $245 billion currently and wonders how such low a value could ever make Bitcoin qualify as a world-class currency.
Nolan says a Bitcoin’s value is really tied to its utility at various places. For example, in corrupt or economically weak places, such as Zimbabwe or Venezuela, a Bitcoin holds a lot more value because it’s seen as a hedge against inflation and political uncertainty. In other locations, such as New York, its utility lies in hedging against fiat currency manipulations. Its popularity in Japan is a hedge against the yen’s devaluation because quantitative easing by the Bank of Japan has diluted people’s savings. So a Bitcoin’s value springs from its utility and independence.
Nolan adds that setting up an account to buy Bitcoins is easy. Steve confesses to buying Bitcoins in small amounts to get a feel for the marketplace.
The Nefarious Use of Cryptocurrencies
Steve segues into how much of Bitcoin’s anonymity results in nefarious transactions such as drug deals or arms trades. Nolan says that exchanges do track and report Bitcoin purchases in excess of $10,000 to prevent their use for money laundering and other illegal activities. Despite its vaunted anonymity, Bitcoin transactions can be, and have been, traced by sophisticated cyber-security cells. Moreover, the dollar—in its hard cash and electronic forms—is, by far, the currency of choice in illegal transactions, so Nolan isn’t overly concerned about Bitcoin’s misuse.
Is Bitcoin Yet Another Bubble?
Finally, Steve cites Jamie Dimon, the CEO of JPMorganChase, and Warren Buffett, who both believe Bitcoin is a speculative instrument that’s currently in a bubble and will crash someday. Nolan is not so sure and believes naysayers do not fully grasp the utility and power of getting cryptocurrencies into the hands of ordinary individuals—and leaves it at that. But with Bitcoin up 15,146% in 2017 alone, it’s hard to believe this isn’t the craziest bubble we’ve ever seen!
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: I’ve decided to rerun my bitcoin segment again this week. This was a segment I aired a few weeks ago. As you probably know by now, bitcoin has been in the news of late because the price of the coin catapulted to over $11,000 in a matter of days and is starting to spark more speculation and more investor interest. So, if you’ve heard this segment before, I apologize playing it again, though I think hearing it twice will probably have some value to you. And if you’re hearing this for the first time, I hope you enjoy it and I think it will help you understand a little bit more about this unusual, futuristic currency.
I don’t know about you, but I want to know more about bitcoin. So, today, in order to get to the bottom of what it is, what it can be used for, and what it’s really worth, I invited Nolan Bauerle. He’s the Director of Research at CoinDesk. Welcome to the show, Nolan.
Nolan Bauerle: Thanks for having me, Steve.
Steve Pomeranz: So, first of all, what is CoinDesk?
Nolan Bauerle: CoinDesk is a media site dedicated to telling the story around the rise of this new asset class. It launched in 2013 out of England and from there has managed to form relationships with some of the most important thinkers, movers, shakers in this entire industry.
We were doing it before it was cool, so we got the inside track and established a lot of really interesting relationships, and from there we put on the largest block-chain technology conference in the world every year here in Manhattan where we’re located. And from there, we try to follow not just the technical innovations—we certainly do that—we also follow the leading minds and the ideas that are behind all of this.
Steve Pomeranz: Yeah. So, you don’t buy and sell the coins themselves; you are kind of a source of information and dissemination of the world of cryptocurrency.
Nolan Bauerle: You got it, and we did something very early on that’s not related to buying and selling, particularly, but that has implications.
In the early days of bitcoin when the price really started to rise in 2013, there was a lot of arbitrage opportunity because various exchanges were informal and the rates were wildly different. So, people made a killing trading with a friend in London and another friend in New York City, and you could get really great opportunities. So, what we did was we created something called the Bitcoin Price Index, the BPI. And the BPI is an aggregate of several exchanges around the world, exchanges that charge fees so that it’s not just machines turning a trade so that the price can be affected that way.
So what we do is, we created this matrix of exchanges all around the world that we found were credible, well-run exchanges. And we took that BPI, and it is now generally regarded as the de facto Bitcoin price quote in the world. So, if any major news publication goes and quotes the price of Bitcoin, it will be from our BPI which is the aggregates of exchanges around the world.
Steve Pomeranz: That’s great, that’s great. All right, so let’s talk about the currency itself. So what makes bitcoin and other crypto-currencies different from the normal currencies? The dollar, the euro, the yen?
Nolan Bauerle: Well, fiat currencies are controlled by centralized entities that set monetary policy. If you go back to the Teddy Roosevelt days, for example, they were against even creating the Federal Reserve because they thought the power to do this was inappropriate to give to anyone, that the tool itself of monetary policy should not be left in the hands of politicians and governments that perhaps don’t want to pay back the same amount that they borrowed.
Steve Pomeranz: Yeah.
Nolan Bauerle: So, they’ll charge an inflation, and it might get diluted. And we’ve seen, particularly with senior citizens, they’ll retire and if they have the good fortune to live a long life after, they might have been very comfortable when they retired at 65 but their savings will have been diluted 2% a year because that is a target of a lot of these central banks.
Steve Pomeranz: Okay, so let me stop you there for the purpose of time. So how does bitcoin deal with these issues of a centralized currency? And you mentioned inflation, how does it fix or help with inflation?
Nolan Bauerle: So bitcoin, well, there’ll only ever be 21 million bitcoins in the world, and that’s one of the things that bitcoin did that was different than any other innovation around digital money before. What bitcoin managed to do, for the first time in history, was create something that was inherently digital. Its native nature was digital, but that was also property. So if you think of property and digital, it could be copied and pasted, you can’t think of it as limited in a sense, right? It was very easy to just take the little code and copy it. Bitcoin, the beauty and the innovation of bitcoin was that it cracked that nut.
It figured out how to make something that was inherently digital valuable, and the way it did that was—take a minute and think about the thought experiment, if a tree falls in a forest. So. if a tree falls in a forest, did anyone hear it? In the case of bitcoin, if a tree falls in the forest and a million computers with cameras see the tree fall and then have the ability to vote independently between themselves about what happened having happened, and they come up with a conclusion in a voting way, then we can be sure that the thing happened. There is no more dilemma; there is no more thought experiment. So, in the case of bitcoin, what it did was it took away a master copy of a ledger of a database and it said all of these miners—so, in this case, the computer is looking in the forest for trees to fall—what it did was it said, we’re each going to keep a copy. And each of us, instead of having a master copy of a ledger, the true master copy becomes simply the most popular and widely held and agreed upon version of the facts.
Steve Pomeranz: Wow, what a great explanation.
Nolan Bauerle: And by doing that, it created digital property for the first time ever. That never existed before because you had to trust someone to keep a centralized ledger.
Steve Pomeranz: Wow.
Nolan Bauerle: And then the elegant solution is, well, how do you get all these computers into a forest to see if the trees are falling? Well, you pay them. That’s how new bitcoin is created. These miners are incentivized to go in there and watch for these transactions. And by lottery, one of them will receive bitcoin as payment for providing the security and transaction processing power. So, to put that in perspective, bitcoin, in its short history—it’s not old—has already accrued more computing power than the 10,000 largest banks in the world combined. This is an incredible amount of hash power. It’s called hash power which is a reference to the cryptographic tool that’s used to do this. So here we’ve got something that’s created digital property for the first time and has created an incentive model to build this incredible computer network through no central planning, just through economic incentives.
Steve Pomeranz: All right, so great explanation. I’ve been looking at this for a long time, and I think I’ve got it for the first time really.
Nolan Bauerle: [LAUGH]
Steve Pomeranz: And I’ve read a lot about, not the currency, but the block-chain technology and so on. That was a great explanation.
Okay, so, there are no dollars, there’s no, I mean there’s no printed anything. It’s all virtual, it’s all on the Internet. But here’s a question, you said that there’s only 21 million bitcoins that-
Nolan Bauerle: There’ll only ever be 21 million.
Steve Pomeranz: There will only ever be, it’s not even, they’re not even at 21 million yet, I suppose. But if the price of bitcoin is $6,000 a coin, I know it’s over 7 as we speak, but let’s just use that. I did some simple math, that’s $126 billion. I mean what kind of, you can’t create a world-class currency for $126 billion.
Nolan Bauerle: Well, I mean I think it’s rubbing up against Israel right now and the shekel. It’s passed quite a few prominent countries with prominent fiat currencies. I mean, relative to the US dollar, it’s still just a drop in the bucket. But other currencies, it’s certainly if you would look at a list of the total value of currencies in various countries, you’d see them in the top 100, I believe right now, in terms of total value.
Steve Pomeranz: So, the price-
Nolan Bauerle: But don’t-
Steve Pomeranz: Go ahead. Well, let me just ask this question. So, if there are no more coins than 21 million being created, that means the price would have to rise in order to create a larger market or a larger valuation. Is that the only thing that would create a greater valuation or greater, I don’t know how to even put the word…market.
Nolan Bauerle: Utility, perhaps? A greater market? Yeah, I mean now that people are opening their eyes to some of the use cases, let’s look at Zimbabwe right now. Zimbabwe is trading, I mean you can go there and do some of this arbitrage. I think you can get about $12,000 for a bitcoin in Zimbabwe right now because they’re victims of the bright ideas of the governments over there. And you look at Venezuela with their hyper-inflation, and there’s a real appetite for bitcoin because they see what’s going on. And if you take a look at some of these, Mike Novogratz for example, here in New York City. He has made a real killing over the past couple years simply betting on bitcoin as a hedge against Chinese currency manipulation. Likewise, the addiction the Japanese have to quantitative easing. You’ve got terrific volume in bitcoin over in Japan for that very reason. People know that their savings are being diluted and this is the hedge against that. Here you’ve got an instrument that is not going to be diluted by the decisions of a political entity.
Steve Pomeranz: So it’s decentralized, that’s one of the big factors here. You don’t have a country like the United States controlling a money supply which affects other countries in the world because, so you’ve got, you don’t really have a singular power. How easy is it to set up an account in order to buy bitcoin?
Nolan Bauerle: It couldn’t be easier. So, a lot of the exchanges, several years ago, realized that they were a lot like money services businesses. Which means that they wanted to follow the anti-money laundering and know your customer provisions of FINRA and FINTRAC and in Canada. So most of the $10,000 transaction thresholds, so when you transact in $10,000, you have to share certain private details about yourself.
What a lot of these exchanges did was they set the same threshold voluntarily, they said we’re not so different from a foreign exchange desk. If you buy at larger amounts, you will have to be KYC’d which means you’ll have to share personal information, your address, who you are, where you live.
Steve Pomeranz: Sure.
Nolan Bauerle: But if you transact at small amounts, it’s possible to make anonymous purchases. And that really is part of the value proposition of block-chain technology outside of bitcoin, but bitcoin being the major idea behind this. Where one of the great things about bitcoin and crypto-currencies is that they are push transactions.
Push versus pull, a pull transaction is what happens with your credit card where what you’re really doing is allowing the bank to go into your wallet and pull the money out. In order to do that they have to know an incredible amount of information about you to make that happen.
But we’ve unleashed a public health epidemic because of this because we’ve shared our personal information with just about anyone who asks. Home hardware rewards points and selling hammers and all this stuff. So we’ve got a real problem on our hands here. And what bitcoin did was say that, well, actually in the digital sphere, possession of a cryptographic key which is how bitcoin is traded in your wallet, you buy bitcoin through digital wallets or you hold bitcoin through digital wallets. But you’re really holding a digital wallet…are the cryptographic keys. And you can think of bitcoin as this, cryptographic keys that move memory. And the memory is the property that I talked about earlier, the digital property. The limited amount of memory that we know is valuable and can’t be copied and can’t be counterfeited. So we have these keys, and you hear it in law that possession is nine-tenths of the law. Well, in the case of bitcoin, possession of a cryptographic key is ten-tenths of the law. It’s the whole thing.
Steve Pomeranz: Okay.
Nolan Bauerle: You have the keys, you are who you said you are.
Steve Pomeranz: All right, well, let me stop you there. I will be honest and say, I think I understood about seven-tenths of what you just said. [LAUGH]
Nolan Bauerle: 70%’s not bad.
Steve Pomeranz: [LAUGH] Yeah, it’s a start. So, let’s just say right here that there are apps available on your smartphone that where you go in and you can buy a bitcoin.
Nolan Bauerle: Yes.
Steve Pomeranz: I have done it myself in very small amounts to kind of get a feel for the marketplace, etcetera. So buying them is not easy, there is a transaction cost. But you really don’t have to give really any personal information in order to do this, which brings up kind of the other side of the coin, the nefarious use of the cryptocurrencies. And you know, is it possible that Kim Jong Un could be buying nuclear materials using bitcoin or the mafia or just generally drug trafficking of the like? I mean that’s the one thing that the government has some jurisdiction over the currency, that’s one thing that they can try to stop.
Nolan Bauerle: Well, they can try to stop with the bitcoin too, and they can try to stop it with the US dollar but, of course, Kim Jong Un is probably buying nuclear material with dollars. The mafia is probably after dollars; arms are regularly traded around the world illegally with dollars. Drugs, of course, are traded with dollars. And dollars are really difficult to track, actually. Where in the case of bitcoin, every single bitcoin has a complete history of its transaction. So, each individual coin you can trace back to its original transaction.
Steve Pomeranz: Well, okay, hold on, you can trace it back to its transaction, but can you trace it back to its owner?
Nolan Bauerle: There are some tools that allow you to do that, it’s called graph analysis, and it does happen. There are specialty businesses that do that on behalf of the government or in contract with the government. IRS or FBI, I think Denmark has a cyber unit that is very adept at this.
People have been arrested for various drug charges related to bitcoin transactions which were traced through this database, the blockchain that bitcoin uses.
Steve Pomeranz: One final question-
Nolan Bauerle: So that has happened many times.
Steve Pomeranz: One final question because we’re running out of time. Jamie Diamond of Chase, who is a man I respect and is not someone who would put down things for competitive purposes; Warren Buffet is similar. And both of them have said that Bitcoin is a speculative instrument. It’s currently a bubble that will crash and burn someday like so many other hyped securities. What do you say about that?
Nolan Bauerle: Well, I would say, first of all, that the cryptographic utility is not being understood very well. Here you’ve got cryptography that was once the sole domain of the military after the Nazi Enigma and the Turing efforts at Wesley Park.
Steve Pomeranz: Yeah.
Nolan Bauerle: Then cryptography became a bit like a side business. Banks would do it and you gave them your dog’s name and your mother’s maiden name and they kept passwords and all the stuff on you and then it helps you transact. But the mere introduction of a third party into the satisfaction of our cryptographic needs was a problem. By asking other people to do that for us, we created a place that people could attack. By bucketing, by putting all of our personal information in one place in order to allow us to transact on the Internet, we created a target, a fat, juicy target. And that is under siege if you look at Equifax-
Steve Pomeranz: Yeah.
Nolan Bauerle: -and all these other guys.
Steve Pomeranz: Right.
Nolan Bauerle: This is a big, big problem. And the Internet is quite young actually, we’re only 25 years down this road and we’ve built it one way. There’s actually many other ways we can use it for information to consume, it’s great.
Steve Pomeranz: Not to interrupt, but we are out of time. The bottom line is you think there is real utility here that Warren Buffet and Jamie Diamond are overlooking. There is a there there.
Nolan Bauerle: We are talking about individuals using cryptographic keys themselves for the first time at this scale in history.
Steve Pomeranz: Okay.
Nolan Bauerle: This is the widest deployment of the power of cryptography to the individual and this will not stop.
Steve Pomeranz: My guest, Nolan Bauerle, from Director of Research at CoinDesk. I guess CoinDesk.com is your site?
Nolan Bauerle: Yes, sir.
Steve Pomeranz: Very good, thank you for joining me, Nolan, appreciate it.
Nolan Bauerle: Thank you for having me.
Steve Pomeranz: All right sir that was wonderful. To hear this interview again and to get the hard-hitting facts covered on your own at your own time, don’t forget to go to stevepomeranz.com. Once again, Nolan, thanks for your time. I appreciate it.