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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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 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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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 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.
"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 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.
"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.
"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.
"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.
"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 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.