WBD185 Audio Transcription
Beginner’s Guide #4: What is Bitcoin with Stephan Livera
Interview date: Thursday 9th January 2020
Note: the following is a transcription of my interview with Stephan Livera from The Stephan Livera Podcast. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In Part 4 of The Bitcoin Beginner’s Guide, I ask fellow podcaster Stephan Livera, what is Bitcoin? We discuss how Bitcoin works, its key features such as decentralisation and censorship resistance and the reasons why people might want to own it.
“This is a long term project; this is like civilisational infrastructure that we are building here.”
— Stephan Livera
Interview Transcription
Peter McCormack: Hi Stephan, happy New Year! How are you?
Stephan Livera: Thanks Peter. I'm doing great, how are you?
Peter McCormack: Really good, thanks! Thank you for agreeing to do this. As you know, I'm doing a beginner's guide to Bitcoin. I've done three shows so far. I covered why people need Bitcoin,. I covered what money is and I've now done a bit of the pre-history with Aaron. We looked at Bit Gold and eCash and all the precursors to Bitcoin.
Now I want to get into explaining to people what Bitcoin is. But hopefully we're not going to go too deep, I just want people to get a light understanding of what Bitcoin is, so if they've got an interest, they can learn a bit more. You cool with this?
Stephan Livera: Of course, let's do it!
Peter McCormack: Alright, cool. So the whitepaper drops in 2008, 31st October, my birthday. I was actually in Vegas, I think I've already mentioned this. Then on January 3rd 2009, the protocol drops, Bitcoin drops to the world, but what is it?
Stephan Livera: You can go a long way with this! But the short answer of it is, this was Satoshi's statement, his proposed solution to this idea and it was a multi-decade process. There was a build up to this as you covered in your earlier episode with Aaron. So this was essentially, at that point, it was disclosed mainly to the Cypherpunks, who are these cryptographers and privacy activists.
At that point then, I think some of the initial interaction, it wasn't huge. because it's one of those things where there were lots of attempts. I think it wasn't like, "oh, this is it! We know this is the one!" It sort of took some time. Then I guess if we sort of advanced forward to early January, when Satoshi, the pseudonymous creator of Bitcoin, started the Bitcoin network. He or she or whoever, started running the software.
Then very soon after that, Hal Finney, another legendary Cypherpunk and much of his work also went into Bitcoin, such as proof of work. So that's where the network really started. Obviously, this is very much all before my time, I've just sort of learned this just from hearing from people in the Bitcoin community and just reading. In those early days it was very much like Cypherpunks privacy activists, very computer program and nerdy types and a few libertarian types as well later on.
Peter McCormack: So Bitcoin drops itself, you can ask people and they'll say different things. Some people say Bitcoin is money, some people will say Bitcoin is gold. Some people say it's a financial protocol. Trying to get a new person and not have enough kind of clear and distinct answer can be quite complicated. I tend to think it can be all three of those things.
Stephan Livera: I think the framing I like best is digital, hard money and hard money is the money that's hard to make. It's not an easy thing to make. I think the other part that's really crucial to understanding Bitcoin, is to think of it like a savings and a payment technology in both ways. It's a really advanced version of that. But it in some ways it can also be seen like a savings and payments or payments technology of last resort.
So when you can't make a PayPal or credit card payment, Bitcoin is pretty much always there and it's always running. That's another way to think of using Bitcoin, it's something that you can use and it's been designed in such a way that it's just so hard to stop. That you can use that as your last resort if everything else has failed.
Peter McCormack: Let's go really super simple then, let's keep it easy for people. Bitcoin is a form of money, it's a type of money and Bitcoin itself is also a protocol. Let's separate what the two are, because unfortunately, the currency is called Bitcoin and also the protocol is called Bitcoin. Let's start with the currency Bitcoin itself. What is it made up of?
Stephan Livera: There's two parts to it. So the currency of it, the token if you will, you can think of it like how we've got dollars and cents, we've got Bitcoin and Satoshis. Every Bitcoin is divisible down to 100,000,000 Satoshis or in the community, we say Sats. This money if you will, has been designed with a hard cap in mind and so there will never be more than 21,000,000 Bitcoins.
Peter McCormack: So if I have Bitcoin, essentially I've got Bitcoins and Satoshis like dollars and cents, it's a type of money that's denominated in that way. I guess if I want to use it, I can use it on my phone or my computer, but when I'm using it, is this when I interact with the Bitcoin protocol?
Stephan Livera: Yes, that's right. What you would use to do that is something like a bitcoin wallet. An example that you might do is you might have some Bitcoin on your phone and you might be buying something from somebody in person. They might hold up a QR code to scan and then you might scan that with your phone.
Then your phone will read that and say, "oh okay, would you like to pay 0.01 Bitcoin to Peter" or whoever, then I would scan that and I would press send. Then what's happening in the background is the Bitcoin wallet application on my phone is acting like an interface with the Bitcoin protocol. In order to do that, it's creating a transaction and it's sending that transaction across the Bitcoin network from me to you, in that example.
Peter McCormack: Right. So similar if I have a PayPal account and you have a PayPal account and I want to send you $5,000. I just log into my PayPal, I look up Stephan, I send $5,000 and off it goes to you. With Bitcoin, I have a wallet and if you have a wallet and I want to say send you, half a Bitcoin, I then just put in your address and it does it the same. Or is there something different going on?
Stephan Livera: Great question. There are a few differences there with PayPal, because with PayPal, think of it like they are maintaining a central database of who has what. Fundamentally the unit that's being transacted on PayPal is different. For example, you might be sending me pounds or US dollars. Whereas with Bitcoin, it can be a little bit confusing because Bitcoin is the payment network or the protocol and it is also the token, the unit.
The other part that's different with Bitcoin is it's intended to be like a peer to peer cash. Now that means that you're not trusting a third party. In that PayPal example, you and I, we're both trusting that PayPal will not censor or stop that transaction. Whereas in the Bitcoin world, it's much more difficult for that to be stopped. because it's just basically that you're running this software and I'm running this software. We use it to just send to each other.
Peter McCormack: Okay, right. So with PayPal when I choose to send $5,000, I'm telling PayPal and they're updating the database they've got and they're telling you and then you know. But with Bitcoin is different because there isn't a PayPal at the centre?
Stephan Livera: That's right. What is actually happening is Bitcoin users, when they run the Bitcoin software, they are keeping their own ledger of the transactions of Bitcoin. That's what this idea that we call, trust minimization, which means I'm not having to trust PayPal, I'm actually checking that using my own Bitcoin software. That checks the rules of Bitcoin and checks that yes, that is a valid transaction that Stephan was sending to Peter for example.
Peter McCormack: I get it. So PayPal has this central database and we tell them and they update it. Whereas this one, there is no PayPal, we all hold a copy of the database. So you have a copy, I have a copy and when I make a payment to you, it updates my version and updates your version and updates everybody else's versions. So everybody carries an identical copy of this ledger?
Stephan Livera: That's right, everyone carries a copy of the ledger and I suppose one part that might be a little bit confusing, is that you don't necessarily know who is behind what address in Bitcoin. But fundamentally, that's right. It's a little bit of a mind shift, but once you get used to it, it's actually really simple once you get started. That's why typically when a more experienced Bitcoiner is trying to teach a new Bitcoiner, they might just start them with a small transaction, just to see what it looks like and because once you get started with it, that's really when it feels a lot easier.
Peter McCormack: So the protocol is essentially the software that runs Bitcoin? We can all download it and use it if we want to or we all can interact with it. But everybody who downloads it, carries a copy of the full ledger.
Stephan Livera: That's right.
Peter McCormack: Great! Getting my head around this Stephan. Let's talk a little bit about the protocol. I've heard about this thing called the blockchain. What's the blockchain?
Stephan Livera: Think of it this way, transactions in Bitcoin are put into a block and then the blockchain is literally a chain of blocks. The cool thing with Bitcoin is that it uses some of this fancy cryptographic, maths or magic, if you might want to think of it like that. What it does, is it change these blocks in such a way that it's hard for us to bluff each other about what was the true state of that ledger or the history of Bitcoin. The way Bitcoin works is that each block builds on top of the other and there's an increase in block height.
So each block builds on top of the other. Each part of the mathematics of it is that each block contains what's known as the double SHA-256 hash of the previous block. What it does is it creates this overarching system that's in some ways, hard to compute but easy to verify. Without going too much into the detail around like mining and so on, maybe we can do that after, but the basic idea is that the miner might expend a lot of energy trying to mine the correct block in what we might think of like a lottery system.
But then each Bitcoin user, when they're running their Bitcoin node in their software, it's very quick for them to check that it's correct. The analogy often used here is like Sudoku. When you have a Sudoku puzzle, it's very difficult to first solve it. But If somebody hands you the solution, it's very quick for you to check, "oh, yeah, that's the correct solution to this Sudoku puzzle."
Peter McCormack: Right, so basically the blockchain is the records of all the transactions? So when we talked about spending and sending money to each other, they exist in these blocks. It's like, every 10 minutes, a block is created and it's hard links to the previous block. So it can't be undone, so everybody can trust it.
Stephan Livera: That property is known as immutability. The concept there has also been explained, is like amber. It's like the more amber that gets formed around it, makes it more and more difficult for somebody to go back and try to rewrite history. Let me explain, why are we doing this? Why is it that this is really complicated system? Why can't we just use a normal database? Well the problem in Bitcoin that we're trying to solve is how do you make this system trust-minimized.
How do you make it so that it can't so easily get shut down? Let's say big government or big business wants to go and tamper with the ledger. If they took that ledger, let's say we trusted one person, but then the government or the business someone or some bad person goes and takes that ledger away. Then how would the rest of us know which one was the right one?
Well, so that's this concept of us coming to what might be called consensus in a distributed way. Not in any kind of way that the head can get lopped off. Your listeners might be thinking of say BitTorrent. When people use BitTorrent, they are all sharing that file. You can think of Bitcoin in... There’re some parallels there with BitTorrent, because we're all sharing that ledger around with each other constantly.
Then when we see a new update to that ledger, you and I, our Bitcoin nodes will share that information with each other. Then we sort of say, "oh, have you got the latest transaction" or "have you got the latest block" or "here it is." Then we have to sort of all agree on what's known as the state of the network or what is known as the ledger that we are all transacting on.
Peter McCormack: It's almost like everybody who's part of the network works together to keep it honest, to ensure that everyone's got the latest sets of transactions. That makes sense. What stops somebody cheating it?
Stephan Livera: That's a good question. Part of that is your full node and your Bitcoin software has certain rules that it is checking. It will not accept a transaction or a block if they are not valid by certain rules and this comes back to some of that cryptographic mathe-magic, if you will, as we were talking about earlier, it's checking that certain rules are met. One of those is that, this comes down to hashing, one way to think of hashing is like a fingerprint.
You'll always produce the same fingerprint, but it's extremely hard to find another person with that exact same fingerprint. You can think of kind of a digital analogue of that. If you have a certain file and then you run a hash function on that, it will always produce the same result. But if you change the first part, the pre-image, the part before you've run the hash on it, it will change the end result dramatically.
That is one concept that gets used within Bitcoin to make sure that the same input will always produce the same hash. Then that hash is always of a fixed size. Then basically, brute force trial and error is the only known way to get that and that's part of how we know that it was difficult for the miner to correctly find the proof of work for that. Then there's other certain rules like most accumulated work, there's certain rules that basically the Bitcoin network uses to come back to consensus if there is ever a split.
Peter McCormack: I get it. So everybody who wants to be part of the network and download the software. Everybody has the software that's running the same set of rules. So you can't cheat the system because we've all got the rules. Then if I want to make a payment in the system, and I broadcast that payment, everyone gets broadcasted that payment. So everyone is aware of it. Then all those payments in every 10 minutes are blocked up into a block, securely put away and then we start again.
Stephan Livera: That's right! That process happens on average every 10 minutes. Then that is just an ongoing process, a never ending process.
Peter McCormack: So the blockchain is also, it's like a chronological history of all transactions?
Stephan Livera: That's correct. If you download Bitcoin and run Bitcoin today, it will have all the transactions, all the way back to what we call the Genesis block which is the first ever block in Bitcoin in early January 2009.
Peter McCormack: Somebody's listening right now Stephan might be going, "what the hell, I just came to learn about digital money. You've talked to me about proof of work, you've talked to me about nodes. You've talked about all these crazy things, this is really complicated. I don't know what's going on!" I always think a good starting point is go create an account, go to Kraken, go to Coinbase and buy your first bit of Bitcoin and then download a wallet. Once you've got a wallet, once you move from one to the other, that's almost your starting journey to get a feel for what this is. How do you feel about that?
Stephan Livera: I think that it's all part of the journey and you might go to a Bitcoin meetup or you might have a friend who's into Bitcoin and they might set you up with a small mobile wallet. That's one way to interact with Bitcoin and you might buy a small amount of Bitcoin or maybe they'll just give you $5 worth or just a small amount of Bitcoin and that is a typical way that people get started.
Just by understanding, this is how I receive a Bitcoin transaction and this is how I send a Bitcoin transaction. At the start, you don't need to worry too much about the details of like, "oh, what is a node" and "how does mining work" and blah, blah, blah. You can just start with the basic app and then over time, you improve your knowledge on it. Just build that knowledge until you get to the point where you know how to run the Bitcoin software for yourself.
Peter McCormack: So don't get scared off, go buy a little bit, have a little play, have a play with some wallet. So then just start going down the rabbit hole, that's great advice. We talked a little bit about this protocol, who manages the protocol? Who's in charge of it? What stops somebody going in and writing some little hack into the code so they can steal Bitcoins?
Stephan Livera: Great question! Bitcoin is an open source protocol. That means all the code that is inside Bitcoin Core and Bitcoin is open source, meaning anyone can see it. That means anybody can also contribute to it. You may propose your own improvement or you may propose a change to the code of Bitcoin and because all the discussion happens out in the public, you can literally go to github.com and see the code for Bitcoin.
You can participate in the discussion on IRC, you can participate in the discussion on mailing lists for Bitcoin and there are also other forums as well where people will discuss about Bitcoin and conferences etc. People also write papers and so on. Now to answer your question about could somebody try to steal Bitcoins? Well, this is where the importance of review comes in. Bitcoin doesn't just accept any code change at all. It requires going through certain processes of review. Before a software developer can successfully put that change into Bitcoin, it has to go through a review from other members of the Bitcoin community.
Then a Bitcoin maintainer has to actually merge that change, basically meaning accepting that change to the code of Bitcoin. Now, it might sound a little strange to listeners who are not used to the idea of open source, but basically it just means all the discussion happens out in open and anyone can make a contribution. But it's not that all contributions are accepted, it's that there is review and there's testing and so on before any serious changes are merged or accepted into the Bitcoin protocol.
Peter McCormack: A little bit like how when we were doing payments, we all had a copy of the software, we were all kind of trusting each other and working together to ensure that all payments are secure, as similar things happen on the back end, is like there's a group of people working together to keep the code honest.
Stephan Livera: That's right. There are differing levels of competence. Not everyone is a developer. I'm not a developer, you're not a developer, but we might have friends who are developers or we might pay someone who is a developer to review code for us.
Or we might participate in the discussion and see from what other people are saying. In that way, users of Bitcoin also have a say, in what Bitcoin becomes, because it's not just a developer who are the benevolent dictators, because ultimately, developers can create some code that users don't necessarily have to run. Sometimes, there's a little bit of an aspect of building agreement or building support for a change. That's something that we have seen in Bitcoin for the larger, big changes.
For small low level changes that aren't that important, those can sort of just happen in the background, well kind of in the background for the average user, but if it's a big important change, in what we call a change to the consensus of Bitcoin, then it requires a lot of review from not just the developers but all the kind of parties in the Bitcoin ecosystem if you will, like miners and exchanges and payment processes and merchants and users and developers.
Peter McCormack: That sounds complicated. The next thing, I'm thinking, "right Stephan, I like this Bitcoin, I'm going to get myself some, I'm going to have a play with it." So I go sign up to an exchange. I've been told the exchange is where to buy them and then somebody said to me that you need to store your Bitcoin in a wallet. What's a wallet?
Stephan Livera: Right, so a wallet, think of that as an application that manages your Bitcoin for you. Now in Bitcoin, one way to think of it is like a key chain. You have multiple addresses, you can think of that like sort having different accounts. So every time you want to receive Bitcoin, your wallet will generate a new address. Now in the background, your wallet manages this for you, but it has a key associated for that address. You can think of it like, if somebody gets that key, they can spend your Bitcoins.
That's why it's very important that you keep your keys secure. Think of it like there's lots of addresses and your wallet manages a key chain of all the keys that are associated for those addresses. Then the way the Bitcoin network works or the way the rules are set, it's kind of set like the person who proves that they have access to the key and typically that's done with what we call a digital signature. That digital signature is sort of a way that you can prove you hold the key for this address without necessarily telling the world the key, because obviously now they could spend from that address too.
The way it works is your wallet manages all that in the background for you, such that when you want to spend, it picks, "okay, I'm going to send this coin to Peter or whoever and here's the key" and it will sign that transaction and it will broadcast it to the Bitcoin network. That's that gossip process, where all the Bitcoin nodes talk to each other and say, "oh have you got all the transactions, here's the transactions."
Peter McCormack: So a wallet is where I keep my Bitcoin. I can have separate addresses, separate accounts. A bit like I have my savings account and I have my current account, I can have different Bitcoin addresses. It sounds to me like the key is like a master password for each address.
Stephan Livera: Right. You don't need to go into the technical aspects of it, but think of it like you have a master key and this master key gets you access to all of your Bitcoin that's held on that particular wallet. So that master key gets you access to all the different addresses and that is the thing that you need to keep backed up. That's also the part that you need to keep a secret obviously. It's an imperfect analogy, but people might think of it like a banking password kind of thing. When somebody gets that, they can get your money. So be very careful with that and that's where you've got to take security precautions.
Peter McCormack: When I first start with Bitcoin, when I start playing around with my first wallets, will I actually have to use that key or it will be done for me?
Stephan Livera: The wallet manages the key for you in the background. But you may need to log into that wallet, there might be a PIN code to log into that wallet, but that's not necessarily the same thing as the key. Again, that's where some people who are new to Bitcoin could fall down or they fall into a trap where they haven't kept a backup of that key. Typically, that is 12 or 24 words and we call it like a seed.
A 12 or 24 word seed and they need to keep that seed backed up and potentially a passphrase which you can think of like the 13th or the 25th word on your seed. Typically when you set up a wallet, it won't always be at the very start, that depends on how the wallet was designed. They will give you that 12 or 24 word seed and you would normally write that down and you would keep that in a safe place. Or you might even keep that on a metal backup. But that's basically what you're thinking of it like your password or really that's your seed.
Peter McCormack: Okay, so I create my wallet, it has this master key that allows me to log in and send and receive Bitcoin from the various addresses. But also you're saying, I need to backup that and hide it away in case I lose it. But what if I lose it? Can I just use my restore password? Will there be a restore password button?
Stephan Livera: That is one of the big differences with Bitcoin, is that there are no bailouts in Bitcoin. That is why it might be a little bit scary at the start, but we have to learn to basically advance our knowledge and our personal accountability. This is one area where if you have a seed and if you've got a passphrase, you need to keep those backed up.
You absolutely must! Because if you don't, that's a common trap. What happens with Bitcoin is if you lose the seed and or passphrase, you basically lose access to that Bitcoin. So it's basically like those Bitcoin will get trapped in the ledger forever, because no computer is strong enough to crack that password. That's kind of a simple way to understand that.
Peter McCormack: One of the early things I'm going to have to do is go down the security rabbit hole, learn a bit more about security, how to protect my Bitcoin. He has a lot to learn here but still, I've got my wallet, I've got my Bitcoin Stephan and I'm going to play with it now. So I want to send you some Bitcoin. How do we do that? What do I do?
Stephan Livera: There's a few different ways. I might show you a QR code and you might scan that with your phone. Then your phone will read that and say, "okay, it's 0.1 Bitcoin" or whatever and then press "send." Another way is I could copy paste an address. Nowadays that will look something like a string of letters and numbers and I might start with BC123X, whatever. It'll be like 20 or 30, characters whatever. I could paste that to you online and you could also pay a set amount of Bitcoin, but I guess one part here that you've got to be wary of is, Bitcoin is its own unit. So it might be a certain number of Satoshis.
But because the exchange rate is fluctuating over time, that can be a little confusing for people who are new, because they haven't quite grasped that Bitcoin is its own unit of account. What might first be $10 worth of Bitcoin, let's say the price fluctuates and now that's actually worth $11. That's a little part that you'll have to just get your head around. But once you do a transaction or two, you'll start to get used to that idea.
Peter McCormack: I kind of get it, you're going to send me either a QR code or a string of characters and I'll put that in my wallet to send to you. Then I'll click "send" and do you get the money straight away? Does the Bitcoin come to you straight away?
Stephan Livera: What happens there is your Bitcoin transaction gets broadcast to the network straight away, so everyone on the network can see it. But remember that amber concept, that only happens once every 10 minutes. That is what we call a confirmation or aka when a miner finds a block in this kind of decentralized lottery system and they include your transaction into that block. Now there's a few other complexities around it, things like the fee rate and so on.
But for now, I think it's simple to just say your wallet deals with that. Your wallet includes the fees and so on. Then on average, every 10 minutes, a new block is found. Most of the time if you're lucky, your transaction will get included in the very next block, but if not, don't fret because it just might mean it's still waiting to get confirmed and that might take another 2 or 3 blocks or who knows. But that's kind of the short way to think of it.
Then on my side on the receiver side, I have to be careful that I don't just take a Bitcoin transaction incoming without also waiting for a confirmation. I would normally have to wait until your transaction has actually been included inside a block. It's been confirmed before I may now spend it on onwards. Until then I need to wait because that's part of Bitcoin's security.
Peter McCormack: So you're essentially waiting for the amber to lock around the transaction like you said before, lock around it, make sure that's a confirmed transaction, it's real and it exists.
Stephan Livera: That's right, because up until that amber has locked around it in this analogy, I don't have it for sure, because there are some attacks that can be performed now. Again, most of the time your wallet will deal with this for you generally speaking, you just wait for a confirmation. Now depending on the amount as well, if you're waiting and if you're just receiving a small amount of money, then okay one confirmation is probably fine.
Even in very low amounts, you might even take a zero confirmation. But generally speaking, that's not the practice. For high amounts, if you're spending $100,000 or something like that, then you normally want to wait more confirmations. You might want to wait 4, 5, 6 confirmations for that kind of money.
Peter McCormack: Still very complicated. Lots to get through here, but I'm interested. Okay, it seems kind of cool. But why do I really want to do this stuff? Why should I care about Bitcoin? Why do people actually care about it? Because when I use PayPal or use my bank account, I don't have to think about this.
I login, I put your email address in, I send you some money or with my bank account, I log into my bank account, I can send you some money. If I make a mistake or somebody steals that money, I can get it back. Bitcoin it's like, there's all this complicated stuff I've got to understand and I've got to learn. If I make a mistake, I lose it all. So why should I do this? And why are people doing this?
Stephan Livera: Great question! So it comes back to two points, I would say. Comes back to that idea of it being a better savings technology and also a better payments technology, there's two parts of it. Let's talk about the payments part first. There are some people who don't have access to PayPal or credit cards or they've been de platformed or de-banked. Those people basically have to use something like Bitcoin, because it's much harder for them to use cash over the internet, obviously.
That's one way that they are able to still accept payment for their services. This can happen in different scenarios where somebody has been, say kicked off social media or maybe the payment processers don't like them or for whatever reason, they've been de-banked. That's one part of it. Then the other part of it can be thought of a little more difficult to think of in the short term, but it's more like a longer term aspect of it, where people who buy bitcoin and over the longer term when they have really taken a long time horizon on their purchase of Bitcoin, they've been up in purchasing power terms.
Part of the reason for that is that, now again, this is being honest and being open, this is speculation. This is basically that you're speculating on future adoption of Bitcoin and also speculating on this future value of Bitcoin relative to other forms of savings that you could have held. In some ways, it's kind of like a hidden tax of inflation. Where if we keep pounds in your bank account or I keep Australian dollars in my bank account, over time, the amount that I can purchase is going down.
Peter McCormack: Why is that?
Stephan Livera: Because we have a fiat money, banking and money system and fundamentally, what is done by that is we have... So without going too much into the detail, governments have created central banks and they've created a banking infrastructure that creates inflation. For example, when a commercial bank creates a loan in a fractional reserve banking system, they are actually loaning new money into existence, ex nihilo, just out of nothing. What that does is it causes what we call the Kantian effect.
What that means is the person who's getting the new money first is the winner and the person who's getting that new money by the time it's flowed out to everyone else, they are in this sense the losers, because they are spending at today's prices with kind of yesterday's purchasing power. Whereas if you are the bank or you're the person getting the loan from the bank, you're getting the new money first, you're getting to spend it first and you're getting a benefit out of that. That causes this systemic impact to the system, which continually devalues all of our money.
Then the other factor to lay on to that is, typically there are capital gains tax laws in most countries. So when you buy an asset or you buy a house and the value of that goes up, part of that value going up isn't really like real value going up, actually part of that is just inflation, it's just going up because of inflation. But then that's getting taxed away, because that's getting added to your tax return at the end of the year. In that way, people can think of Bitcoin as a kind of savings outside sort of independent of the mainstream banking system and independent of the government.
People can speculate on that with a percentage of their investment or if they want to regularly accumulate, known as dollar cost averaging or "stacking sats", as we say, there are ways that people try to accumulate a position in Bitcoin and they do that typically because they have a future bullish belief on Bitcoin. This has sort of proven out over the history of Bitcoin is that, there are people who bought at a high and then lost money.
But typically, they weren't that many people who bought at that high and typically the people who held for a long enough time, eventually got out into the positive. But again, that is a speculation, we should be upfront about that. It's two prongs, it's a savings technology and a payments technology that difficult for somebody to stop you. That's kind of one of the powers or special things about Bitcoin.
Peter McCormack: So this is when we talk about magic internet money then, the money that just goes up in value. The speculation is we're speculating that Bitcoin will continue to grow, more people will want to use it, more companies will want to accept it and as more people use it, there is a higher demand for the Bitcoins that are available and therefore the value of Bitcoin goes up. But where Bitcoin you're saying is different from government money, is that you can't print anymore, so there still will only ever be 21,000,000. Therefore it is a speculation on growth.
Stephan Livera: That's right. Right now today, as we record this, the number of bitcoins outstanding is something like 18.1 million or something in that region. Most of the bitcoins that are to be issued have already been issued. I think it's in the maybe early or mid 2030s when 99% of Bitcoin supply will have already been issued or already been created into existence. That last 1% is getting mined or created from that time in the mid 2030s all the way to 2140.
Part of that is just to understand exactly how scarce Bitcoin is, because there will never be more than 21,000,000 and there's more than that number of millionaires in the world. So if every millionaire in the world wanted 1 full Bitcoin, they couldn't get it. That is part of why many of us are very bullish on Bitcoin, because we see it as something that's strictly scarce and not just that, that the amount of incoming supply every year is very scarce.
Peter McCormack: There's lots of speculation covered, but the speculation is linked to use and what we are all saying here is people might want to use it. Some people who can't get access to banking services or some people who want to send international money internationally.
I've got it actually a good example right now. I have some money in my PayPal account and it's locked and it's been locked for a week, as they want to verify something. I can't actually use that PayPal money. So if I wanted to send you some money now Stephan, I could use Bitcoin. What are the advantages of using Bitcoin right now to send you money over, say my bank and PayPal?
Stephan Livera: Well Bitcoin is designed to be a more permissionless system and that's the key part that I think you're hitting on there, which is that banks and PayPal have to comply with a whole swathe of government rules around financial controls, things like AML and sanctions and so on.
Whereas the Bitcoin network is not subject to those. If you're directly using Bitcoin, you just basically scan the address, you pay it and off you go. In that way, it's designed to be very open permissionless and what we also call censorship resistant. It's there to stop censorship of transactions.
Peter McCormack: Right, well it sounds pretty cool. Are there any disadvantages? What are the disadvantages of using Bitcoin?
Stephan Livera: Well look, part of it is again, the security of it. It can be difficult to secure, it can be a long journey to learn how to use it correctly and safely. There have been hacks of people who have not held that Bitcoin securely, there have been people who have not held their backups correctly. There are risks around things like if the miners were to attack the network or somebody went to try to attack the network.
Now for the most part, the incentives of the system are designed in a way to stop that kind of attack. It sort of makes it more that people who want... It's better or more profitable for you to just legitimately participate in the network than to attack the network. But truthfully said it is a risk, those are some of the key risks. Some people say things like, "oh, the government would ban Bitcoin." I think that's unlikely, but again, it is a risk. I just think it's extremely unlikely.
Peter McCormack: The next thing I'm going to recommend people do Stephan, is we're obviously asking these questions, like neither of us know, like I don't know anything. I've got a bit of experience, but one of the things that was very difficult in the early days, is whilst people say Bitcoin doesn't have a community, there is a group of people who are interested in Bitcoin and they seem to have a kind of set of shared values.
Now I know it's not a prerequisite to buy Bitcoin and be involved in Bitcoin to have these shared values, but they still exist. What are the kinds of things that Bitcoiners care about? Why are these people kind of on the same page? What are the important things that Bitcoin is doing?
Stephan Livera: I think there's fundamentally a commitment to things like the 21,000,000 cap. That's a very important thing within Bitcoin, that people don't want any inflation beyond the 21,000,000. That's one thing that everyone's really committed to or most people are committed to. They're really committed to this idea of censorship resistance, this idea that payments should not be censored and that's something that people try to preserve.
They are also in some sense conservative, they are very careful about any changes to the Bitcoin protocol, because they rightly say that this is a very long term project, that this is like civilization or infrastructure that we're building here and that we have to be really careful. It's a really mission critical sort of software. Other values of Bitcoiners is, and it's valued to different degrees by people but privacy is another aspect as well. There are people within the Bitcoin world who try to make sure that payments are private.
That's a more advanced discussion, but that's rightfully something that has to be mentioned as a concern, that people might share that they don't necessarily want to link their Bitcoin transactions with their real world identity and they will take steps to try to preserve that distance, if you will and create an ability for them to use Bitcoin to buy things that they don't necessarily want people to know that they bought. It could be something like you want to protect your privacy and you might buy a VPN service and you might pay for that with Bitcoin, that's one example there.
Peter McCormack: It sounds like Bitcoin is an underground group of anarchists and rebels trying to keep the government away from understanding exactly what they're doing?
Stephan Livera: So look, I won't deny that there are some people like that. Bitcoin is a broad church, if you will. You don't necessarily have to be anarchist to use Bitcoin. Because we think of it more like, Bitcoin is just a stronger money. It's a superior money and people will just adopt it over time. because it's a harder money and it's a more scarce money.
Now another few examples I could present are people who are coming from more like a journalist perspective and they are trying to expose, let's say wrongdoing or corruption in the country that they live in and they have a need for a payment system of last resort, they would also use Bitcoin. Then there's a whole range of people who come from the more sort of white market world of fully compliant, everything Bitcoin. There's a really a big range of people who are in Bitcoin, it's not only privacy activists, let's say.
Peter McCormack: Cool! So I'm going to buy some, I'm going to go on to an exchange and I'm going to get myself some Bitcoins. I am going to go and check out Kraken. While I'm there, I did notice there's a few coins, there's a few things I can buy. I noticed there's a few things called Bitcoin, there's Bitcoin Cash, I know there's a thing called Ethereum. A lot of them seem cheaper? Bitcoin has gone up quite high now, so I'm thinking perhaps I might try and invest in some of these other ones. What do you think about that Stephen?
Stephan Livera: There's a lot of what we might term "cargo cult." There are people who try to mimic certain aspects of Bitcoin and then pass off the coin as though it was Bitcoin or superior to Bitcoin or cheaper than Bitcoin. To explain the analogy, I think there was some islands in the Pacific and during wartime American planes would land there and drop supplies and so on.
Then later, after the war had ended, they would try to almost invoke the planes to come back by setting up a fake runway or a fake hut or a fake air traffic guy, because in their minds, they thought just by recreating this thing, that the planes would come and drop supplies and so on. But they didn't understand the war was over. In the same way, some of these alternative coins, they have tried to copy certain components of Bitcoin and pretend like they're all part of the same industry and that they too, are like Bitcoin, but they're just fundamentally not.
Now a few key reasons, they typically tend to have a more centralized development process or they might have, what we might term a "benevolent dictator." That person who can drive development and they can just sort of put their foot down and say, "no, this is what we're developing, we're going this direction."
They might have certain angles of centralization, where let's say, the US government could come to the Ethereum Foundation and just try to lay down the law and try to say "no, we don't want you to transit or permit the transaction between this person and that person." Another thing that some of these alternative coins have done is make a certain trade off on security, without necessarily telling the people who are being marketed to. They might say, "oh look, we've got faster block times, we've got faster transactions", without also saying that actually they trade it off security in order to get that.
My suggestion would be just stick to Bitcoin and learn and read about Bitcoin first. The reason for that is, those reasons I mentioned earlier. But also that there's a lot of churn in this space. If you look at the top 10 leaderboard, 5 or 10 years ago, it was very different. Only Bitcoin has remained at the top, whereas a lot of those other coins have gone in and out. Part of that comes back to this concept of network effects.
With Bitcoin, Trace Mayer talks about this and other people mentioned as well, Bitcoin just has the strongest network effects. Other people can try to copy certain aspects of it, but fundamentally, it just kind of coalesces back towards the best one. That is measured not just in terms of technology, but also as a money. That's one way to think about it and some of those aspects on which that happens, is things like liquidity. Bitcoin actually has the best liquidity out of all of the "cryptocurrencies."
It also has a strong number of developers, a good number of users, transactions, miners who are securing it, there's more exchanges and there are more merchants who accept payment in Bitcoin as well. That's part of it as well because when you're buying something that you want it to be a money, you want to care about who else is the network that I could transact with for that money. Bitcoin has the biggest one for that of all the cryptocurrencies so to speak.
Peter McCormack: Right, so you're saying to keep away from them because they don't really have the network effects of Bitcoin. they're not decentralized like Bitcoin, so ultimately if you're speculating, it's a much higher risk of speculation.
Stephan Livera: Exactly right, I would agree with that!
Peter McCormack: What about my mate Dave who said he invested in all these ICOs and made a bunch of money. Should I also be investing in ICOs or should I avoid them?
Stephan Livera: Obviously, I would avoid. There have been many, many scams in the space. In reality, many of these ICOs have tried to market themselves, maybe not even intentionally, but they just try to give off this impression that "hey, you might have missed the boat on Bitcoin.
It's too late for that, but you can get it on the ground floor with this one, so do that." What happens is a lot of people don't realize that actually in these ICOs, there's groups dumping onto other groups. There's insider groups that get the real better price and then they're dumping their bags so to speak on the next layer down, then they'll be dumping on the next layer down. That is why I would caution very carefully against ICO investment and really learn to understand a bit more about Bitcoin before you try to branch out.
Peter McCormack: Wow, there's been a lot here Stephan and I was going to ask you about Austrian economics and libertarianism, but I think that might be a step too far for today, so we might do that one separate. Perhaps I'll point them in the direction of the show we made about that. But this has been an amazing, there's been so much here. I want to take a step further, what are the things I should do now? Tell me what to do now after this show.
Stephan Livera: I would say, like you said, you want to just get a small amount of Bitcoin just to get some skin in the game, so to speak. Then there's a bunch of resources in the Bitcoin community obviously. There's your podcast, there's my podcast, there's a few good books that are good to read as well. So a few books that I typically recommend, one is "The Little Bitcoin Book" and other one is "Inventing Bitcoin" by Yan Pritzker, "The Bitcoin Standard" by Saifedean Ammous, those are some resources that I would point them to.
Then I would point the listeners towards getting a hardware wallet, I think that's a good step to take as well. But again, it's a journey and you don't have to, we're not expecting you to be a hero straight away. You just have to build your way up to that.
Peter McCormack: If I'm feeling nervous, if I'm feeling like "God, there's so much I've got to take in here", any advice for me?
Stephan Livera: I would suggest going to a local Bitcoin meetup. I think that's probably the best way that you can meet someone in person and typically, if there's a Bitcoiner there at that meetup, they can point you in the right direction and give you some resources or give you some in person coaching. Otherwise you can find some coaching online or you can find, podcasts and YouTube and articles and books. But I would say probably your best bet is actually going to a local Bitcoin meetup if you've got one in your city.
Peter McCormack: Fantastic! Well Stephen, thank you for coming on, I know this is a very different show from a normal one. Appreciate your help in keeping this simple for everyone. I will share out your show in the show notes and advise people to go and follow you on Twitter as well. Thank you for this!
Stephan Livera: Thanks very much for having me Peter, it was a pleasure!
