Bitcoin

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal delve into the history, technology, and investment potential of Bitcoin, the decentralized digital currency that has outperformed traditional investments with a staggering 3 million times return since its inception. They explore Bitcoin's evolution from a white paper by the pseudonymous Satoshi Nakamoto to a global phenomenon, despite its initial use in illicit markets like Silk Road. The episode examines Bitcoin's core functions, network effects, and its comparison to gold and fiat currencies, highlighting its potential as a hedge against inflation and currency devaluation. They also discuss the environmental impact of Bitcoin mining and the future implications of cryptocurrency on the financial system and government control over money. With institutional investors now entering the space, Bitcoin's role as a store of value and its scalability as an investment opportunity are scrutinized, suggesting that while it may not have achieved its original goal as an efficient payment system, its growth and acceptance continue to present significant upside.

• Coindaddy highlighted the importance of developing entertainers from within the crypto culture, as opposed to external sources.
• The quote from Coindaddy emphasizes the need for a cultural shift towards embracing and cultivating talent from within the cryptocurrency community.

"Right now, all our entertainers come from outside crypto culture, not inside crypto. We've got to change that."

The quote signifies the current state of entertainment in crypto culture being dominated by outsiders and the desire to change this dynamic.

• Ben Gilbert introduced himself as the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.
• David Rosenthal introduced himself as an angel investor and advisor to startups based in San Francisco.
• This episode marks a departure from the usual company-focused discussions to cover a topic that is not a corporation.
• Bitcoin, despite not being a corporation, has outperformed traditional investment returns.

"Welcome to season eight, episode one of Acquired, the podcast about great technology companies and the stories and playbooks behind them."

This quote sets the stage for the podcast episode, introducing the hosts and the theme of the season.

• Bitcoin's rise from less than one cent to over $30,000 per coin represents a significant investment return.
• The hosts speculate that Bitcoin's return may be the greatest over a ten-year span in human history.
• Comparisons are made to other significant investments, such as Nasper's investment in Tencent and Softbank and Yahoo's investment in Alibaba, which do not come close to Bitcoin's return.

"Today we are talking about the single greatest ten-year investment return in human history, bitcoin."

This quote highlights the episode's focus on Bitcoin's unprecedented investment performance over a decade.

• The podcast recognizes the ingenuity behind the Bitcoin protocol and its mathematical mechanisms.
• The identity of Bitcoin's creator, Satoshi Nakamoto, remains pseudonymous, adding to the cryptocurrency's mystique.
• Bitcoin's evolution since 2009 and its current position in the mainstream are subjects of discussion.

"There is no denying the unbelievable cleverness of invention. Of all the math and mechanisms behind the bitcoin protocol itself, it is truly a beautiful and ingenious system."

The quote appreciates the innovative design and technical sophistication of the Bitcoin protocol.

• The Acquired Limited Partner program offers in-depth interviews, company-building topics, and live recording access.
• The Acquired community is praised for its high caliber of participants, including CEOs, executives, and venture partners.
• The program fosters networking, career opportunities, and partnerships.

"You'll get access to our library of over 50 interviews and deep dives on company building topics, our monthly Zoom calls, and this is new live access to listen in while we record big events like emergency pods like the Slack one we did last month."

This quote describes the benefits of becoming an Acquired Limited Partner, emphasizing the exclusive content and community engagement.

• The traditional financial system is not designed for the digital age, with outdated methods of transferring money.
• The reliance on routing and account numbers exposes the system to fraud and inefficiencies.
• The discussion reflects on the history of banking, checks, and credit cards, and their evolution to meet the demands of commerce.

"I entered my bank routing number and I entered my account number and I told them to take out many thousand dollars from my account. And they just kind of did."

This quote illustrates the speaker's concern about the ease with which money can be transferred, highlighting potential security issues in the financial system.

• The internet's growth has increased the volume and complexity of financial transactions, revealing the limitations of the existing financial infrastructure.
• Attempts to create digital currencies pre-bitcoin, like Digicash and e-gold, were made but failed to solve the double-spending problem.
• PayPal emerged as a digital payment system, but it operated within the traditional financial model and faced issues with fraud.

"While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model."

This quote, from Satoshi Nakamoto's white paper, critiques the trust-based model of the traditional financial system and sets the stage for Bitcoin's alternative approach.

• Bitcoin proposes a peer-to-peer electronic cash system that does not rely on trusted third parties.
• The white paper by Satoshi Nakamoto outlines a system that addresses the weaknesses of the traditional financial model, particularly non-reversible transactions and high transaction costs.
• Bitcoin's blockchain technology ensures chronological order of transactions, preventing double-spending and fraud.

"A peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions."

This quote from the white paper explains the core mechanism of Bitcoin's blockchain, which secures the sequence of transactions.

• Miners contribute computational power to verify and secure Bitcoin transactions.
• As a reward for their efforts, miners receive newly minted bitcoins.
• The difficulty of mining adjusts to ensure that blocks are created at a consistent rate, adding to the security of the network.

"The first coin on the block gets given to you as a thank you for doing the work to verify the integrity here."

This quote acknowledges the incentive structure for miners who support the Bitcoin network by validating transactions.

• Bitcoin mining initially rewarded 50 bitcoins per block, approximately every ten minutes.
• The reward decreases over time, currently at 6.25 bitcoins per block due to halving events every four years.
• Bitcoin's total supply is capped at slightly under 21 million, ensuring scarcity and value.

"So it started with 50. So if you mined a block, which again happened every ten minutes, you got 50 bitcoins in the beginning. Now I think it's down to six and a quarter."

This quote explains the initial reward for mining a Bitcoin block and its reduction over time, which is a fundamental aspect of Bitcoin's design to create scarcity.

• Bitcoin is not inflationary; it has a finite supply.
• The system uses a halving function to reduce mining rewards, ensuring a predictable and declining schedule of new bitcoin creation.

"And it uses sort of a having function so that every four years, I think the reward gets cut in half. So there is only a certain amount of bitcoin that will ever be mined."

The quote clarifies Bitcoin's deflationary mechanism, where mining rewards halve every four years, contributing to its overall scarcity.

• Bitcoin's value comes from the computational work required to maintain its system.
• The work done to secure and operate the Bitcoin network gives the currency its worth, not government backing.

"The coins get created by doing the work to make the system what it is, which is really, really good. So the value is in the work itself."

This quote emphasizes that Bitcoin's value is derived from the computational effort invested in securing and operating the network.

• Bitcoin's integrity comes from the work done by miners.
• The network starts small but gains certainty and robustness as more transactions are verified.
• The transaction history acts as a de facto chart of accounts, ensuring ownership and transfer accuracy.

"What you have from the work being done is a system of integrity. And the network effect may be small to start, but you can count on the fact that you can be very certain that all of those transactions have been combed through."

The quote explains how the work done by miners creates a trustworthy system where past transactions are meticulously verified, contributing to the network's integrity.

• Owning Bitcoin means owning a part of the system's computing power.
• The first owners of newly mined bitcoins are the miners, followed by subsequent transactions.

"What you actually own is you own a piece of the computing power that has gone into making this system robust and secure and viable and good for everyone."

This quote conveys that owning Bitcoin is akin to owning a stake in the computational resources that uphold the system's security and functionality.

• One-way functions are mathematical operations easy to perform in one direction but difficult to reverse.
• Multiplying two large prime numbers is easy; factoring them back into the original primes is hard, a principle used in cryptographic systems like Bitcoin.

"The magic that kind of makes this one way function work is the fact that it's easy to multiply two prime numbers together, but very difficult to factor large primes."

The quote illustrates the concept of one-way functions, which are crucial for cryptographic security in Bitcoin and other systems.

• The concept of one-way functions was hinted at by William Stanley Jevons in 1874.
• Modern computers can solve some of these problems, but extremely large numbers remain practically unsolvable, ensuring cryptographic security.

"Can the reader say what two numbers multiplied together will produce? The number 8,616,000,460,799. I think it will be quite unlikely that anyone but myself will ever know."

This historical quote highlights an early understanding of the difficulty in reversing certain mathematical operations, a foundational concept in cryptography.

• The existence of true one-way functions is not proven, but they are widely relied upon in encryption and security.
• Bitcoin and many other systems depend on the assumption that these functions cannot be efficiently reversed.

"We're pretty sure that you can't do something the other direction in a computationally efficient way. But we're not provably sure."

The quote expresses the current understanding and reliance on one-way functions for security, despite the lack of formal proof of their irreversible nature.

• If an efficient method to reverse one-way functions were found, it would compromise Bitcoin and many other security systems.
• The entire concept of secure transactions and communications would be at risk.

"But the point is. Yeah, that would break bitcoin. That would also break everything, all security you could log into any account anywhere."

This quote underscores the catastrophic consequences that would arise if one-way functions could be reversed efficiently, affecting not just Bitcoin but all digital security.

• Public key encryption is an advancement of one-way functions.
• It allows for secure communication where a public key is shared openly, but only the holder of the private key can decrypt messages or authorize transactions.

"This concept is actually born out of that 1874 discovery of prime factorization."

The quote connects the historical concept of one-way functions to the development of public key encryption, a critical technology for secure digital communication.

• Public key encryption was independently discovered by two different groups in the 1970s.
• One group, in Britain, kept it secret for defense purposes, while the other publicly announced it as RSA encryption.

"And it's crazy to me that it's kind of like physics or calculus, where private public key encryption was sort of dual discovered in the same decade by different people who had no notion of each other."

The quote reflects on the phenomenon of simultaneous independent discoveries in science and technology, with public key encryption being a notable example.

• Bitcoin's value grows with its network economy, akin to social networks like Facebook.
• The system gains value through increased participation and usage, following Metcalfe's law.

"It's just like, you know, think back to the social network, which is going to come up in a know that line of, like, if you created Facebook, you'd have created Facebook."

The quote draws a parallel between Bitcoin's growing network economy and the concept of network effects popularized by social media platforms.

• Many have attempted to create alternative cryptocurrencies (altcoins) by forking Bitcoin's source code.
• Early network growth and use cases are crucial for a cryptocurrency's success and value.

"My favorite little tweak on this and dogecoin. And thousands and thousands of people have tried to create alternate cryptocurrencies with varying levels of success."

This quote highlights the proliferation of altcoins, each trying to capture a share of the cryptocurrency market through different strategies and innovations.

• Satoshi Nakamoto, the pseudonymous creator of Bitcoin, launched the system in January 2009 and mined the first block.
• Nakamoto recruited a community of developers and researchers, then disappeared after handing over control.

"So in January 2009, Satoshi boots up the system. Essentially, he codes it up, he creates version 0.1, which is amazing, by the way."

This quote marks the historical moment when Bitcoin was launched, setting the stage for its growth and the involvement of a broader open-source community.

• The first documented real-world Bitcoin transaction involved the purchase of two pizzas for 10,000 bitcoins.
• This transaction established an initial value for bitcoin and demonstrated its potential for real-world use.

"So somebody in England of all places, all the way across the Atlantic Ocean, sees this and is like, I'll do that. I'll take 10,000 bitcoins."

The quote recounts the famous "pizza day" transaction, where Bitcoin was used to buy a tangible item, proving its viability as a currency.

• Satoshi Nakamoto's true identity remains unknown, with no personal information ever revealed.
• The use of "we" in the Bitcoin white paper suggests the possibility of a group behind the pseudonym.

"Satoshi did none of these things. And to this day, it could be one of ten people who people think it is. Or it could be none of those people. We have no idea."

This quote conveys the enduring mystery surrounding the identity of Bitcoin's creator, with no conclusive evidence pointing to any individual or group.

• The Silk Road, an online black market, became the first "killer app" for Bitcoin, facilitating illegal transactions.
• The platform operated for two and a half years, significantly contributing to the growth of Bitcoin's network and transaction volume.

"This is just amazing. The story, and this is actually when I first started hearing about bitcoin, was I started reading the headlines about the Silk Road and what was going on, and I was like, whoa, that's like crazy. But this bitcoin thing is kind of interesting underneath it."

The quote reflects on the Silk Road's controversial role in popularizing Bitcoin, despite its association with illicit activities.

• The FBI conducted a sting operation leading to the arrest of Ross Ulbricht, the operator behind the Silk Road.
• Ulbricht's arrest and the subsequent shutdown of Silk Road drew significant media attention to Bitcoin.

"So finally, in October 2013, FBI agents. This is amazing. Conduct a stingray. They arrest a man named Ross Ulbricht at the Glen Park Library in San Francisco."

The quote details the dramatic takedown of Silk Road's operator, highlighting a pivotal moment in the history of Bitcoin and its associations with the dark web.

• The US government seized a large number of bitcoins from Silk Road and later auctioned them off.
• Venture capitalist Tim Draper purchased a significant amount of seized bitcoins at one of these auctions.

"They hold an auction, an online auction. Like, this is Us marshals. They do a raid, they get drug dealers, like lamborghinis and stuff, and they auction them off. They do the same thing with the bitcoin online."

This quote describes the unusual circumstances under which a government auctioned off a digital asset like bitcoin, a testament to its growing recognition and value.

• Lost bitcoins due to forgotten private keys or theft represent a significant portion of the total supply.
• The irretrievable nature of lost bitcoins underscores the importance of secure key management.

"But is it the pilot's fault when it's hard to fly in a complicated airplane? That's the question here. So, of course you can sort of hack into Ross's computer. You can get his private key, and then you can use his private key to authorize sending that 20, $20 billion worth of bitcoin over to your account."

The quote discusses the challenges and responsibilities associated with owning and securing bitcoins, drawing an analogy to the complexities of piloting an airplane.

• Bitcoin exchanges are crucial for converting traditional currencies into bitcoin and vice versa.
• Mount Gox was the dominant exchange until its collapse, which highlighted the need for secure and reliable platforms.

"You need somebody to stand up the store that's going to accept your dollars and hand you bitcoin in exchange. That store is going to be on the Internet, but someone's got to operate it."

This quote emphasizes the essential role of exchanges in the Bitcoin ecosystem, acting as the gateway for users to enter and exit the market.

• Mount Gox, initially a platform for trading Magic: The Gathering cards, became the leading Bitcoin exchange before its demise.
• Security breaches and mismanagement led to the loss of a vast number of bitcoins and the exchange's bankruptcy.

"So what is Mount Gox? We go all the way back to 2006 when a developer named Jeb McCaleb, who was a big fan. No. In the US, okay, was a big fan, as am I, as are many people of the then going online but physical card trading game magic, the gathering."

The quote traces the origins of Mount Gox, highlighting the unexpected path from a trading card platform to a major Bitcoin exchange and its eventual downfall.

• Coinbase was founded to provide a secure and user-friendly platform for buying, selling, and storing bitcoins.
• The company's cloud wallet service made it easier for the average user to participate in the Bitcoin market without managing private keys.

"It's an exchange and cloud wallet. This is the innovation that it will make some people who are sort of true believers in bitcoin, who are sort of part of the initial movement, it makes their skin crawl because it is ruining the decentralization."

The quote acknowledges Coinbase's role in making Bitcoin more accessible, even if it means compromising on the principle of decentralization for some users.

• The Winklevoss twins invested their Facebook settlement in Bitcoin and advocated for its adoption by institutions.
• They recognized the potential for Bitcoin to become a significant asset class and worked to build the necessary infrastructure.

"It's been so fun to read about this, and I've gone and watched a few videos with them. My opinion has completely changed from doing this research."

The quote reflects a change in perception towards the Winklevoss twins, who, despite their controversial history with Facebook, became influential figures in the cryptocurrency space.

• The Winklevoss twins took their settlement from Facebook in stock, which significantly appreciated in value.
• They invested in Bitcoin early, recognizing its potential as a currency with network effects.
• The twins founded the Gemini exchange, targeting institutional investors and gaining regulatory approval.
• Their early Bitcoin investment and creation of Gemini contributed to the legitimization and growth of Bitcoin as an asset.

"Cameron says in a New York Times article, the lawyers thought we were crazy for taking the money in Facebook stock. We thought they were crazy for taking their 20 million in cash."

The quote reflects the Winklevoss twins' foresight in choosing stock over cash for their settlement, which paid off when Facebook went public.

• Bitcoin's price has experienced multiple bubbles, with each new floor price resetting higher.
• Despite setbacks like the Mt. Gox hack, Bitcoin's infrastructure and legitimacy continued to grow.
• Institutional investments and regulatory advancements have contributed to Bitcoin's increasing stability and credibility.

"Pop, yeah. But with each bubble, it keeps going higher, and then the new floor price resets higher."

This quote highlights the cyclical nature of Bitcoin's price, with each bubble leading to a higher baseline value despite the volatility.

• Bitcoin's early-stage investment parallels with venture capital, where early investments yield high multiples.
• Established firms like Sequoia have capitalized on investing early and continue to invest as companies grow.
• The venture capital approach to Bitcoin has influenced investor strategies and the market's development.

"It's the early stage investments that you can generate those huge multiple returns, but you can't put that many dollars to work in the early stage investments."

The quote draws a comparison between venture capital strategies and Bitcoin investment, emphasizing the potential for high returns from early investments.

• The rise in Bitcoin's value attracted a wave of ICOs, with various projects and celebrities launching their own cryptocurrencies.
• The ICO craze raised concerns over regulation and the legitimacy of many projects.
• Despite the mania, the underlying technology and legitimate projects continued to advance.

"Totally incredible. They say, what if we build an exchange specifically for institutions like Coinbase, have retail."

This quote discusses the Winklevoss twins' idea to create an exchange for institutions, which became the Gemini exchange, contributing to the ecosystem's growth.

• The unregulated nature of Bitcoin and ICOs led to a proliferation of projects and investments.
• The lack of oversight initially contributed to innovation but also attracted fraudulent activities.
• The eventual regulatory actions helped stabilize the market and focus on legitimate ventures.

"It's totally unregulated. So everybody and their mother literally everybody and their mother has an ICO in 2017."

The quote captures the frenzy of ICOs in 2017, highlighting the lack of regulation that allowed for widespread participation and the eventual need for oversight.

• Bitcoin's resilience is shown by its recovery and growth despite market crashes and scandals.
• Institutional adoption has played a significant role in Bitcoin's recent stability and price increases.
• Companies and funds are increasingly holding Bitcoin as a treasury reserve asset, signaling growing mainstream acceptance.

"So over the course of 2018, it falls from under four k. So at the end of two thousand and eighteen, by January 2019, bitcoin is trading at just over $3,700, down 72% for all of 2018 and down 81% from the high in December 2017."

This quote illustrates Bitcoin's significant price drop in 2018 but also sets the stage for its recovery and subsequent institutional adoption.

• The U.S. government's monetary policy, including quantitative easing and zero interest rates, has influenced Bitcoin's appeal.
• The creation of new dollars and the resulting inflation have driven interest in Bitcoin as a hedge against currency devaluation.
• Bitcoin's design counters traditional monetary policy, offering a fixed supply and decentralized control.

"During 2020, literally 22% of all of the US dollars in circulation all around the world are created. In 2020, the debt to GDP ratio of the US goes from, I think it was, I don't remember exactly, somewhere like 60, 70% to 135% over the course of 2020."

The quote provides context for the U.S. government's unprecedented monetary expansion in 2020, which has heightened interest in Bitcoin as an alternative asset.

• Network economies play a significant role in the potential dominance of a cryptocurrency.
• Bitcoin is considered likely to remain dominant due to its established network.
• Branding is not a significant factor in cryptocurrency power; the network behind it is more crucial.

"I mean, I would, but it's more because of the network economies. It's because I feel like if there's going to be a dominant cryptocurrency that is a huge part of our global economy 20 years from now, it's going to be bitcoin and it's not because of the brand."

This quote emphasizes the importance of network economies in the dominance of cryptocurrencies, suggesting Bitcoin's established network positions it for future dominance rather than its brand recognition.

• Government-backed currencies have a significant network economy advantage due to legal and systemic integration.
• The US dollar benefits from being the mandated currency for taxes, wages, and government contracts, creating a vast network of users.
• Cryptocurrencies face challenges in competing with these entrenched networks.

"Government backed currency has an absolutely enormous head start on their network Economy's power versus anything else."

The speaker is highlighting the immense advantage government-backed currencies have in terms of network economies due to their established systems and legal requirements, which cryptocurrencies are currently unable to match.

• Money serves as a unit of account, store of value, and medium of exchange.
• Currency is a subset of money and typically issued by governments.
• The value of currency relies on collective belief, supported by factors like government power or the robustness of a system like Bitcoin.
• A bubble in the context of currency can be seen as a sustained collective belief in its value.

"We can think of money as a bubble that never pops, or at least hasn't popped yet."

This quote suggests that currencies, including fiat, gold, and Bitcoin, derive their value from a sustained collective belief, likening them to a bubble that does not burst, highlighting the psychological underpinnings of monetary value.

• Bitcoin must be scarce, portable, fungible, divisible, durable, and broadly accepted to be useful.
• Bitcoin excels in most qualities except for broad acceptability, which is growing due to network effects.
• Bitcoin is more durable than US dollars but faces challenges in becoming as widely accepted due to the US dollar's strong network effect.

"Bitcoin rates strongly across most of these dimensions, except for broad acceptability."

This quote points out that while Bitcoin performs well across several important attributes for a currency, its broad acceptability is still developing, which is crucial for its long-term success and competition with traditional currencies.

• Bitcoin offers features such as being digital, programmable, decentralized, censorship-resistant, and universal.
• These features contribute to the vision of Bitcoin as a currency for the internet, enabling new possibilities like smart contracts.
• The decentralization and censorship resistance of Bitcoin have gained importance due to recent global events affecting trust in governments.

"Digital, programmable, decentralized, censorship resistant and universal."

The speaker lists the unique features of Bitcoin that differentiate it from traditional currencies like the US dollar and contribute to its potential as a revolutionary monetary system.

• Bitcoin is increasingly viewed as a store of value, similar to gold, by institutions and individuals concerned about inflation and currency devaluation.
• Bitcoin's controlled supply growth rate is already lower than that of gold, which increases through mining.
• The comparison to gold is relevant as Bitcoin may serve as a complement to traditional currencies rather than a direct replacement.

"This is a good store of value. I'm worried about inflation in USD and other relatively secure assets."

This quote reflects the sentiment that Bitcoin is considered a viable store of value, particularly in the context of concerns about inflation and the search for assets that can retain value over time.

• The discussion explores hypothetical situations such as the continued operation of Silk Road or reliance on Mt. Gox for Bitcoin transactions.
• The historical impact of events like the Cyprus banking crisis on the perception and adoption of Bitcoin is acknowledged.
• These scenarios illustrate the role of luck and external events in the evolution and success of Bitcoin.

"What if DPR hadn't gotten arrested and it were still operating? What if Coinbase and Gemini and the like hadn't been built and we were still all running on Mount Gox?"

The speaker is contemplating alternative historical scenarios that could have influenced Bitcoin's trajectory, highlighting the importance of certain key events and developments in its history.

• Bitcoin's initial goal to replace payment systems has evolved, and it may now be better suited for large, secure transactions.
• The need for a more efficient transaction layer for smaller, more frequent transactions is recognized.
• The future may involve Bitcoin functioning alongside other systems, each serving different transactional needs at various levels of the monetary stack.

"The bitcoin blockchain as it exists today is going to be for moving large amounts of secure value around infrequently."

This quote acknowledges that Bitcoin's role has shifted from its original intent as a payment system to a more specialized function for larger transactions, indicating a possible need for complementary systems for different transaction types.

• Bitcoin deliberately uses computational inefficiency as a feature to secure the network through proof of work.
• This approach is novel in an era focused on computational efficiency and may unlock new value for humanity.
• The environmental impact of Bitcoin's energy consumption is a significant concern.

"Bitcoin is one of the first times that we deliberately want to and have done something that is computationally extremely inefficient."

The speaker points out that Bitcoin's computational inefficiency is an intentional design choice that contributes to its security and uniqueness, despite the environmental considerations it raises.