Brother Can You Spare a 01100100?

Now today we want to talk about digital currency. We've already had one podcast that was about what cash is, what currency is, what it represents, and uh, you know, we're all pretty familiar with physical cash, maybe not as familiar as we would like to be were not personally, but hypothetically, I mean ideologically, I get it, I've seen it, I want more of it. But we wanted to talk about some digital currency. Really, it's the first one I

was going to talk about. The main one I'm going to talk about is bitcoin, which is really an alternative currency. It's not a currency that is backed by any particular government, which is kind of an interesting idea. UM, So we should probably start with the idea of what makes a currency a currency? All right? So yeah, what does make what What does make a currency a currency if it doesn't have to be backed by a government. What makes

a currency a currency? Well, I've got a theory on that, all right, probably not original at all, but it seems that a currency is just something that everybody wants, okay, right, it's it's a standardized unit of wealth. And what makes a currency valuable is that you can get pretty much

everybody to agree that they want it, um so. And and this comes in where we have the idea that like currency is magic, right, that that that a US dollar, little green rectangle of paper that says one dollar, you know, and has the creepy triangle pyramid eye on it, like that magically equals one dollar. Well why why does that thing equal one dollar when this piece of paper that I just wrote some notes on doesn't, Or why this other piece of paper that has a slightly different design

on it is worth one hundred of those dollars? Exactly? They're made of the same stuff, Yeah, exactly. I mean, there's nothing about this little physical object that magically equally has that amount of value. Right, It's simply that we we've all agreed, we've assigned to it. We've assigned that to it. Sure, Yeah, and we've agreed to it, not just assigned it, but that everyone has bought into it. Yeah. It is a like I said in the last episode, it is a belief system than anything else. Well, it's

sort of an illusion also because it's the thing. All you have to do to make this hundred dollar bill not worth a hundred dollars is convinced enough people that it's not worth a hundred dollars, right, and then that before any of you go out there and thinks, I think this is gonna make me rich. If I convince everybody that the money in their wallets is worthless, then I can take all their money. But you're a hard job of it, right, Well, first of all, you have

a hard job of it. But too, if you actually did convince enough people for that to make you fabulously wealthy, you wouldn't actually be fabulously wealthy because the money itself would in fact be worthless because again, it's only worth anything because people want it, So if people don't want it, then it's not worth anything. The point is that the value of a piece of money is not magically assigned by FIA. The government can't really say what something is worth.

The people as a whole determine what sometimes, yeah, and and the and that a certain amount of food or a gallon of gas or work that I do for somebody is worth that amount. Right. So so with bitcoin again, because you know, you don't have to have a government to back it. If people say this bitcoin has value, and they and enough people believe in that in enough and enough of a structure there supports it, then it does have value. Well, Jonathan, what is a bitcoin? You're

using this word? So, bitcoin is a unit of digital currency. It was first proposed by a guy named y Day who proposed it in nine. It's an idea. The idea is it's a cryptocurrency, meaning that it is secret like cryptozoology. Well like like not such secret, like cryptography. Yeah, you're talking about encryption. Yeah, something about the currency has to be based on encryption. I'll get into that in a second.

But it's essentially to a digital currency that's used that can be used in transactions, just as any other currency could be. So you would use this digital currency to buy stuff. That stuff could be digital or it could be physical so you could use the this digital currency to buy a real car, assuming that there was a car dealer out there willing to deal in this digital currency. If they accepted it, then you could buy a car

with it or anything else. Um. Now, the actual currency itself, even though it was proposed in didn't start to show up until two thousand nine. And that's when someone who was using a pseudonym. The pseudonym was Satoshi Nakamoto, began to published a paper in a in a we'll not published a paper wrote in a forum actually about cryptography, about a proof of concept for this digital currency, and

that was the birth of bitcoin. Interesting thing, Uh, only a few people, I assume know who this person is because this person has never been publicly identified or one of them. No, I do not know the actual identity. I am not privy to such information. Um And if I did, I wouldn't tell you. So maybe I do, but I don't. So here you think about it. If you have a digital currency, can you think of any questions off the top of your head, like things that if if the currency is digital, what are some of

the questions that arise in your mind? Well, first of all, what is it? I mean, a US dollar is a little square or not square, a little rectangle of paper I put in my wallet. What what is this unit of currency? It's a block of data. Okay, yeah, where does that come from? Okay? So, uh the furs it's mind, which sounds kind of interesting. The way it works is that you have to create transactions and then through those transactions you create these blocks of data, which when you

analyze the blocks of data, will create more bitcoins. That's a gross over simplification of what's going on here, but it all comes down to that idea of cryptography. Within that block of data, there is what is called a hash. Hash is essentially when you take uh, some numbers and then you apply math to it. And when I say apply math, the reason why that's vague is because it depends upon the hash about you know what math radical

processes going on? Right? But let's say I tell you that I've got you know, I've created a hash, and I've got a number and that number is fifteen, And I tell you, Joe that I arrived at the number fifteen by adding two other numbers together, but I don't tell you which two numbers they are. And for you to be able to get a bitcoin, you have to

tell me which two numbers I added together to get fifteen. Now, uh, I haven't given you any other information, so you just have to start handing me guesses as to how I got to that number fifteen, Right, And we knew it would be pretty reasonable for you to use a computer to do this rather than just shouting out numbers. Right, But in this let's let's say, in this instance, I tell both of you, Joe and Lauren, that I've got a number fifteen. So you have to tell me which

two numbers I added together to get that number. And uh, the first one who guesses correctly gets fifty new bitcoins. Which what's your guess? What'n eight zero? No? That wasn't that any sorry, but so so what happens? You would keep on guessing until you were to get the ones and it was sixteen, a negative one by the way. Um, if you were to it once you once you were to guess it, I would hand you some bitcoins, not

from me. I would actually generate through this process. It's kind of like the idea of mining a mountain for gold. Would be as if you had found a gold vein while just digging randomly in the mountain, same sort of idea,

you were actually digging randomly using math. Now, in the case of bitcoins, the numbers and hashes are way more complicated than what two numbers that I used to create fifteen, And so you have to use a computer to go through all the various UH guesses that could potentially reach whatever the hashes in order to find uh the result. Now, it takes quite a bit of computing power, actually usually more in fact than than just one laptop. There's a lot of computers that are usually working on one of

these at the same time right now. Well, in the early days, very early days of bitcoin, this is how brilliant this system is, you know, and I say brilliant. This is beyond whether or not bit you consider bitcoin of valuable currency, al right, just the system itself is brilliant.

So in the early early days of bitcoin, those hashes were not so complex, meaning that if you had a decent computer with a decent CPU, you could start having it run these various guesses and expect to maybe solve a problem within um like you know, ten twenty minutes maybe, and and you're you would get bitcoins. So you're just like Mario jumping repeatedly into the block that gives a coin every Now you're like Mario jumping at all these different blocks. In one of those blocks gives coins, the

other blocks don't. That's the that's a better analogy. Um, And so what would happen is that as more people started joining in, and when I said ten or twenty minutes, that's really again that's really exaggerating. But when as more people joined in, that would mean that more bitcoins were being mined because you have more computers working on these problems,

and so things start to unravel faster. Well, then the system itself has a a way of fixing that, because you don't want to flood the market with bitcoins and then you devalue the currency. Right, That's what would happen if if the FED just said, well, let's print infinite money, or it would would be what would happen if you dug under you know, you you reached a mountain, you removed one shovel of dirt and realized that everything under

one layer of dirt is gold. If the mountain is solid gold, you would suddenly devalue gold because there'd be a ton literally, there'll be tons of it flooding the market. Yeah, so there you go. You just devalued gold. Same sort of thing with with bitcoins. You cannot, you know, you have to control that release of bitcoins into circulations. It's intentionally making it difficult to create an artificial scarcity that will keep the value in tax. It's actually you're you're

creating a real scarcity, but you're doing it through artificial means. Yes, synthetic or a forced scarce, yes, yes, yes, So there's a there's already a designated number of bitcoins that will ever be in existence, and beyond that there are no more. That's twenty around twenty one million bitcoins. Now, the bitcoin itself can be divided into smaller amounts down to eight decimal places. So as we get closer and closer to that limit, it actually decreases the number of bitcoins you

will get per successful mining. So like when the it started, the first uh, successful attempts at mining got you about fifty bitcoins. Okay, and uh and what's a bitcoin run these days? It all depends. Uh. In March, it has fluctuated from forty three dollars per bitcoin to seventy eight dollars per bitcoin. As as of this very moment, it is seventy eight point four U S dollars. Yeah, so but as of half an hour ago, things could have changed. Ye. Well,

actually we know that it does. Right, that the bitcoin value fluctuates wildly, crazy amount of fluctuation. What makes some people kind of hesitant to invest in it right now. A lot of people say it's not even a currency, that it's really more speculation, like it's like speculating in a stock that a lot of people are making their money just from buying and selling bitcoin or mining and

selling bitcoins. All right, So getting back to the mining and making it more difficult as more machines join on. It was built directly into the design of bitcoins so that as more computing power is applied to the problem of figuring out these hashes, these transactions each time a transaction is made, that's what's allowing people to mine these other bitcoins um in order to make that when by making it more difficult, it means that you have to

apply more processing power to successfully mine another bitcoin. It's the idea of you're you're in a giant mountain. Let's go back to the mountain idea you're in a giant mountain. There's a finite amount of gold in this mountain, and it's scattered randomly throughout the mountain. Uh. And as you get more and more of the gold from the easier places to mind, the stuff that's left is harder to get to. It's that the you know, by nature, just the natural design, it's harder for you to get to

those places. But here's the other thing, is that if people start backing off of mining, like if if people were to stop dedicating so many computer resources to mining bitcoins, then because there would be less computer power dedicated to trying to get out the bitcoins, it would actually get easier to mind them again, so that the supply of

bitcoins into the circulation would remain fairly steady. Right. It's the way, the way that I understand it and correct me if I'm wrong, is that is that they're using the actual computation of the processing of transactions as a monetary unit. Yeah. Essentially, the as as there are transactions that are going on, that providing the essentially the math problem that you have to solve in order to get more coins. So as more transactions happened, there are more

opportunities as well. Uh. And what happened was early on people started figuring out, hey, the CPU on my computer solves problems essentially going one at a time. Right, it tries option one. Option one didn't work out, Let's move on to option two. That didn't work out, Let's move

on to option three. But they discovered that if they were to use graphics processing units, which can do calculations in parallel, then you could do options one through fifty all at the same time, and then fifty one through one hundred all at the same time. You rapidly sped up the process of trying to solve these problems. So people started using GPUs, they started to mind bit coins.

It was really successful, and then the difficulty ratcheted up to meet the fact that people were using other systems. Then you start networking computers together, and now you've got a group of computers all working to mine bitcoins, which means that again you've got more processing power, so it

ratchets up the difficulty. It's essentially got to the point pretty early on that unless you were designing a computer specifically to mind bitcoins with that sort of processing in mind, you might as well not even try because your computer is just not going to have the needed Like you could still, in theory solve the problem that everyone else is trying to solve, and you could do it first, but but the likelihood was way low, so might as well pay a lotto. Yeah yeah, same sort of odds.

Really is what it boils down to. So okay, So now we've established that we've created this economy based on a or not an economy, but just a currency exactly exists in the regular economy. You've created a commodity, not even a currency, because it's not a currency until someone accepts it as payment for something else. People do that. Yes, so it is a currency. But what we had talked about right now was just as So let's assume now that we're moving on to a currency, people want to

use this to pay for stuff. Um. I I have a friend who's a near do well um, and he's always looking for schemes to get money without working. He thinks up an idea. He's like, I'm gonna buy some bitcoins, okay. And I know when I have a dollar in my pocket and I go to the store and I pay for a bag of doritos, I have to give the dollar to the person working the cash register and I

can't get it back. What if I want to pay for something with a bitcoin, but I figure out a way to make copies of my bitcoins so that I can use it more than once. Okay, here's where the cryptography also comes in. So if you want your do Rito's, as you say, I humans call it doritos. But that's cool. Do Rito's. If I wanted my bag of I'm just giving you a hard time now. No. Uh, this good question was what they grew up in East Tennessee. That

that's fair do Ritos. Well, they use what's called a block chain, and the blockchain is part of that that hash I was talking about that transaction, the history of every transaction for a bitcoin is tracked and incorporated as part of that hash, meaning that when you use that that bitcoin in a transaction, let's say the first transaction, which is when you get the bitcoins. Um, then you spend the bitcoins on something. There's a vendor out there

that accepts bitcoins. You have purchased something from that vendor. The vendor now takes possession of those bitcoins. That information gets incorporated into the hash, that block of text and it's part of the history of that bitcoin. Now you no longer have possession of that. If you were to try and duplicate that in some way, you would have to do it in such a way that would actually invalidate the bitcoins you've already spent. But there's a record

of that. It exists, and it's across all these notes that. One of the things we didn't talk about is bitcoins appear to peer currency, So the information for all those bitcoins is spread throughout the entire network, which means that once you spend it, that information is out there every Yeah, I mean, I mean they don't know that. They don't know that you bought something with the bitcoins. They know that that particular bitcoin was used in a transaction and

where it is now. So for you to be able to to hack the system, you would have to not only figure out the hash of whatever particular transaction you were aiming for, you would alter all the transactions that happened after that point. So if that bitcoin had been in eighteen other transactions, that means that you would have to figure out a way of hacking that earlier point. Where you've discovered that there's a vulnerability and then no one would have to notice the fact that seventeen or

eighteen other transactions were invalidated as a result. So that's where the protection is. It. Actually, the system itself rejects, uh, anything that looks like it's an attempt to double spend, So that that was the because, I mean, that had to be built in there. Otherwise, whenever you talk about digital you're like, well, what stops me from just making a copy and then a copy of a copy so that I become an instant millionaire once I get my

first bitcoin. That's what stops you, right, Yeah, Supposedly, there's only been one major security incident. I think that happened in Uh yeah, there was there was there actually okay, yes, there was a hacking incident there where uh and it ended up getting fixed. But whereas there was that one major incident, there was also the problem of institutions. They're acting more or less kind of like banks and exchanges that hold bitcoins, which is kind of the opposite of

the purpose of the bitcoin, isn't it. I mean, kind of it's supposed to be. I mean, it's like counterculture in that it doesn't require you to have a third party you're you're processing everything. Yeah, they I think the exchange Well, we'll get into some reasons why exchanges exist in a minute, but it's this would be places that would end up exchanging bitcoins for other currencies that kind of stuff. Um, and there have been a few that

had been hacked. In fact, a few that that have gone under since uh the hacking attacks because all all uh confidence on the consumer level stapped away. Yeah, so that's really one of the issues. Another issue with bitcoins is that, uh, it's come under fire from some critics because one of the things that people are using some people are using bitcoins for is to make what would

otherwise be illegal purchases that are not traceable. So they end up buying bitcoins and then use those bitcoins on something like the Silk Road, which is one of those uh it's it's essentially a black market, and black market for drugs is what's mainly known as Star Wars collectors items and mostly drugs. So so you know, we sit there and say like, well, you know, I can't buy heroin with uh with cash because it's gonna yeah, well, because I'll get caught. We're taking morality and ethics and

everything out. This is someone this is someone who who wants heroin and they say, well, I've got bitcoin, so I'm gonna spend it on on silk road. It's completely untraceable. That's one of the criticisms, right, and so, uh, you know, the idea that you could have an entire black market supported by it that's untraceable, that could end up supporting illegal activity. That's one of the reasons why the bitcoin

currency has has received some criticism. Another big criticism is the fact of its volatility, the fact that the value changes so dramatically and so quickly. Um, that's that's an issue. And some people say that it really is more like, uh like a speculative investment as opposed to a currency that not many people are actually using it to purchase stuff. They're using it to buy into it as if it

were a star hypothetical wealth. Yeah, so that's not in that case, it's not you know, really working as a currency. So that that's a valid I think that's a valid criticism as well. So here's the thing that we might have to wonder about with bitcoin or any alternative currency, right because bitcoins are not the only one, no, but it's it's the one that's known as being open source

and peer to peer. There are a couple of yeah, but so is it possible for an alternative currency to overtake the mainstream currency if enough people uh if yeah, if enough people have confidence in the alternative currency and not enough confidence in the quote unquote official currency, then

sure there's no reason. Like if if the entire United States, or at least you know, a sizeable population the population of the United States decided spontaneously that the dollars no longer really had any value but bitcoins did, then that's what would happen, and you would have an enormous economic crisis on your hands. Um, but that it's it's possible. It's not plausible, but it is possible. And and there there are some some government run digital money things going on.

Canada has the mint mint Chip Our Canadian Friends, which sounds like it sounds like cream is a delicious treat. Wait no, it's money cookies chips. But oh yeah, yeah, but no, but but and and this is the Canadian National Bank has released this or is planning on releasing this, this digital money thing. And it's kind of it's kind of a little dongle that you can just sort of poke it at other people's little digital currency and they transfer. So the old cred stick approach, which is what what

was that shadow run where everyone had cred sticks? But uh no, I remember there's some science fiction thing where all of your money was kept on in digital form in some sort of physical device that you carried around, and whenever you want to make a purchase, that would just transfer automatically, essentially of the same thing as the near field communication chips do and smartphones, same sort of same sort of thing, but tied directly into the federal

reserve there rather than through a third party bank. Right. Yeah, So I mean it's there's no reason why a digital currency could not work. Uh. I mean, you can argue that there are some problems with keeping security in a digital format, but the same thing is true with physical currency. I mean, you you've got security issues there too. It's it's you know, it's the question is is the risks so high as to make it impractical? Uh? And or are the Are the risks low and are the benefits high?

If they are, then obviously that would make moving to a digital currency a higher priority. Um whether or not we ever get to a point where dollars are mainly digital.

I don't know. I mean, the other question of that is, do we get to a point where everyone has access to whatever means it is to make these transactions, because cash is also something that that certain segments of the population they can get access to cash, but they may not have access to the to the equipment they would need to make these sort of transactions or to mine bitcoins or whatever. Sure, yeah, you know. Also, I mean, you know, yes, you can break a dollar, Um, you

can destroy a dollar. But but it's I don't know, I feel like it's a lot easier to drop a electronic thing in a glass of water and kill it. That would be hopefully you'd have your bitcoins in the cloud, right yeah, and since it's appeared to peer network, you would hopefully have the ideas that the entire the digital

equivalent of putting your money under your mattress. Well, the idea, the idea is that the entire network would know that those bitcoins were with you, right, so, so there that even if you were to have your computer explode inspector Gadget style, you would still have all that wealth. It's just that you would have to find another way to

be able to make the transaction. Uh. But yeah, I mean there's there there are pros and cons certainly, and uh and to me, it's just very interesting that there was a an attempt to create, uh, a mining operation like that that is sort of analogous to physical mining. It's a little different because we do know that there is a finite limit, and we know what that finite limit actually is. You know, it's not like it's not like, oh no, we found another bitcoin mine. Yeah, we know

that everyone relation for everyone. According to what I read that they twenty one million coins will all be mined by sometime in twenty And the reason for that is that again, as as more bitcoins are mined, they release fewer per year, right, they actually release so that a successful mining attempt ends up getting fewer bitcoins than it did before, usually half of what it was before, so fifty to twenty five to twelve and a half too.

And and because you can divide a bitcoin up to eight decimal places, when we start getting to one forty, when you're mining bitcoins, you're going to get incredibly tiny percentages of an actual bitcoin every successful mining attempt. That also means that you're that the stuff you've mind. Like if if one bitcoin is equal to two hundred U S dollars, then your tiny percentage of a bitcoin is

not gonna be worth that much. But there are also transaction fees that happen, and you end up collecting on transaction fees if you successfully mind bitcoins. So there may come of time where the physical value of the bitcoin you have mind is lower than the amount of money you get in transaction fees. So that's kind of interesting too. It's complicated. I'm curious to see how well it works

over the long run. We've seen some pretty high highs and low lows of bitcoin, because even though you know, seventy eight dollars sounds like a lot, that's not the peak price of no. No, I think I think I saw it go over two hundred dollars at one point. So be interested in what events precipitate spikes in the

bitcoin market. Well there, you know, anytime there's a a crisis where some exchange has been hacked, it severely devalues the bitcoin, which means that which means that by stealing the currency you have actually made it worthless, or at least worth worth worth space less to seal it, right, because if you steal it and suddenly it's not worth

very much, then what have you accomplished? Right, I mean, then you're like, well, especially if it took you a lot of effort to steal the money, you may have spent more time and money trying to steal the stuff than what it ended up being worth by the time you were done. Maybe if you're just a pure sadist and you want to ruin it for everybody, all right,

if you're a troll, if you're a currency troll. Yeah. So, so all of you non trolls out there, if you have any suggestions you would like us to talk about in future episodes, or or if you just want to comment on what we've said already, I highly recommend you visit our website that's fw thinking dot com. There you're going to find links to the video series, podcast, the blogs. They'll find links to our social network stuff, so you

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