LETS TALK BITCOIN

Episode 51 Moneys We Believe In

Participants: Adam B. Levine (AL) Host Andreas M. Antonopoulos (AA) Co-host Dr Stephanie Murphy (SM) Co-host Peter Surda (PS) Panelist (Bitcoin economist)

AL: Hi and welcome to Episode 51 of Lets Talk Bitcoin for October 18 2013. Visit us at www.letstalkbitcoin.com for our daily guest blog, all our past episodes and, of course, tipping addresses. My name is Adam B. Levine and today were back in the flow. Im joined, once again, by Andreas M. Antonopoulos and Stephanie Murphy. Andreas tells us about his recent discovery that not all dollars are created equal, how he found a wallet full of paper and what we can each do to afford a similar fate. Then, we head back to Georgia for a long discussion with Peter Surda, the quintessential Bitcoin economist. This wide ranging interview covers a lot of ground and occupies most of the show. Then, Stephanie has been watching Litecoin for a while and doesnt like what she sees. We talk utility, the market as a forward looking mechanism and a lot more. Video conference passes are now available with the introduction and keynote by Jeffrey Tucker and the first hour long panel available for free. For nearly six hours of fresh conference talks, lectures and panels, support Lets Talk Bitcoin and visit www.bitcoinvideopass.com. Enjoy the show! [1:14] AA: Often, we Bitcoiners make the mistake of trying to create perfect money and in many discussions Ive had, when we talk about things like paper wallets or transacting Bitcoin off blockchain etc, people assume that that can only work with 100% security. The truth is that one out of a thousand of every one of the paper bills thats in your wallet is probably counterfeit and recently, I got that experience firsthand when I was passed $500 in counterfeit $20s. Id like to talk a bit about my experience getting duped more so than usual. [1:51] SM: Sorry to hear about that Andreas, that sucks but wait a minute, arent they all counterfeit? I mean, the Federal Reserve just prints the money kind of out of thin air , thats what we hear a lot of people say. [2:01] AL: Well I guess not all paper is created equal. [2:03] AA: I think its the difference between your worthless fiat being backed by a promise by Ben Bernanke or by Hewlett Packard inkjet printers. [2:12] AL: Its less important about whether or not its paper and more important about whos going to value that paper and certainly some people, you know, I mean counterfeit paper

thats the problem. Andreas, how exactly did this happen? Were you not able to tell between the counterfeit bills versus real bills, I mean because youre a pretty savvy gu y when it comes to this sort of thing. [2:29] AA: Yep, I was duped. I could not tell the difference. I knew there was something a tiny bit off because they felt quite thick. They felt really like brand new bills do when theyve just come out hot off the press. They were still very, very crisp and stiff. That should have been a warning but, at the time, I wasnt sophisticated enough in detecting counterfeit bills and so, therefore, I made the mistake of taking them. Believe me, they look like real dollar bills. Since then, Ive developed a little game that we play at the meetups where I present people with laminated card that has four $20 bills in and I ask them to spot the fake one. I pay a reward in bitcoins just to make it interesting and so far, only about one in four people actually figure out which $20 bill is fake, even though they know that right in front of them they have a fake one and they still get it wrong. You know, I dont think its that easy. Thats really the bottom line. We live in a world without perfect currency security and most of us are ok with that because, most time, we either dont notice or we pass it on without noticing and so bad money circulating with good doesnt completely destroy the good money unless its really at a high percentage of circulation. I think thats an important lesson for Bitcoin too. [3:45] AL: Really its about the confidence that the currency that youre working with isnt counterfeit much more so than being able to provably say that its not counterfeit because again, its less about what the money is and more about what it can do for you. If its fake and its easy to tell that its fake, then chances are pretty good its not going to be as useful to you as money thats not. A fake thats just, you know, thats very close to a fake seems like that could travel through the system for quite a long time before finally being pulled out. [4:11] AA: Yeah. All I care about really is not if the money is real, its if the next person in the chain will think the money is real. If I know its not obviously I cant pass it on. Just for the record I have taken care of those notes so ensuring not to put them back into circulation. However, as I said, it doesnt need to be perfect and as you go along eventually youre going to hit a point in the chain where someone savvy is going to take that money out of circulation. [4:36] SM: How did you discover that they were counterfeit, Andreas? [4:39] AA: I hit that point in chain where someone savvy figured out what they were and took them out of circulation. Unfortunately, for my social embarrassment, that was at a bar when I tried to buy a drink with a $20 and then got chased out of the bar by the bartender once he realised a few minutes later that it was counterfeit. In fact, had it not gotten wet, the bill had passed the first inspection by the bartender so it probably would have gone a bit further in the chain. [5:05] SM: Like Adam said, it really doesnt matter whether the money is real or whether its monopoly money, as long as people believe in it, right? Fiat money is paper money. Its money because its been decreed that its money. It doesnt have a, so called, intrinsic value

like people claim with gold and silver and, perhaps, Bitcoin. It just matters that people have faith and its a mass delusion, in a way, where everybody believes that this money is valuable. [5:32] AA: Yep. Correct. Exactly but, of course, you know that becomes a bit problematic when youre holding twenty five fake bills and youre entire $500 transaction has been done with counterfeit money. At that point, I say the marginal trust has collapsed quite dramatically. [5:50] AL: Andreas, if this had happened and it was on a credit card, then you would be able to call up your bank and say, Hey, this was a fraudulent transaction. They gave me fake money. Theres a problem here. With counterfeit bills, with counterfeit cash, is there any system like that in place to incentivise people turning it in or is it really just better to keep passing it and hoping that youre not the guy who gets stuck with it? [6:11] AA: Well, the Secret Service and Treasury which are responsible for money counterfeiting and currency in the United States have a couple of very helpful web pages where they tell you all about your civic duty and why it is important to help law enforcement with this and a little note at the bottom that says you wont actually get any of your money back. However, they do make it clear that in order to execute this assistance to government you have to provide your name and identification mark, each note individually with your name, date of birth etc and so, of course, my civic duty terminated right there with an immediate call to my attorney with a very simple question. Do I have any obligation, whatsoever, to do something. The answer was no at which point I decided that was the end of my involvement with government and law on this particular topic. Now, if youre wondering why Im not interested in taking out a counterfeiter from circulation, even though I probably could have assisted. Its very simple. I dont want my name on a list. I dont trust government not to go on a phishing expedition. You broke the rule of law? You pay for it. [7:12] SM: Yeah, thank you for telling us that this person gave you counterfeit money. Now were going to go after you until you .... shift the blame onto them. [7:21] AA: Yeah, pretty much. Anyway, so I kept the money and turned it into a parlor game for my meetups and articles and I hope to make slightly more than I was basically scammed out of through this process. It was a very interesting learning experience. [7:33] AL: So your investment in counterfeit funds is really paying off? [7:36] AA: My investment in being a dupe is, absolutely, paying off. [7:42] SM: Yeah, involuntary type of investment. [7:45] AL: Andreas, what are you doing differently now in your local bitcoins transactions that you werent doing before this. I mean, have you taken any actions or changes to prevent something like this from happening in the future? [7:55]

AA: Absolutely. Part of that is kind of general operation of security and part of that is specific to counterfeiting. First of all, I should say that when dealing with cash and doing transactions in local bitcoins, especially if youre doing more than a few hundred dollars, you need to take steps for operation of security. If youre bringing the cash, youre a target. If youre walking away from the transaction with cash and the other person knows it, youre a target. If you actually want to make it to your car without getting mugged, you need to be careful so there are some precautions one needs to take. Now, I was taking those but not necessarily the counterfeiting ones and I tried out a bunch of products including pens for marking the bills, UV lights and various other things. I also educated myself on all of the unique characteristics of a, so called, real dollar bill so that I could better identify them in the future. Now, one important (learning ?) is that none of these detection mechanisms are foolproof and they all look for different types of counterfeiting. For example, the little magic pens you see that people write on the bills and they change color what those are doing is they have a chemical substance that reacts with starch. Now, because dollar bills are made of cotton and not paper, essentially theyre the same as blue jeans. Really, its the same kind of fabric. They dont have any starch in them so they dont get that reaction whereas, if money is printed on paper, it does. However, its very easy to fix that. Bleach a one dollar bill, print a hundred dollar bill face on it and youve got paper that no longer reacts. Not foolproof, right? UV, on the other hand, can reveal color for different type of a bill and in a different location. For example, if you bleach a $5 and you make it into a $20, its going to look weird because the line will glow the wrong color and will be in the w rong place. All of these mechanisms are useful but at the same time you have to kind of apply all of them and be smart. I did another transaction since and very carefully went through every single bill, sat down at a table and did it right. [9:49] SM: Were you carrying around a UV light in your back pocket? I mean, how did you do that? [9:53] AA: I got a little combination pen and UV light. It has a UV light in the cap of the pen but I also had a whole little setup for doing it in a more sophisticated manner. Plus, just for entertainment, what I do is while Im checking all the bills, I give the other person the little parlor games and they can figure out if they can spot fakes. It keeps them occupied. One other important thing I do. From that moment on, when I do local bitcoins transactions, as you approach me, youll think Im looking at my phone and reading something. Im not. Im filming you. [10:22] AL: Ah, identity. [10:24] AA: Absolutely. I will happily delete those videos once a transaction has gone along but for my own protection, I will keep them in case there is an attempt to do counterfeiting. [10:33] AL: Well really, I think what it goes to show, in your experience certainly here, is that in these larger marketplaces, and San Francisco is one of the larger ones for Bitcoin at this point, in addition to the people who are true believers here, you also have people who are criminals, recognise the opportunity here and in much the same way, you know, if like you have some sort of a legal transaction thats for cash. In general, with cash transactions its

very, very difficult to have something to report. You know, in this case Andreas, you were left with a no win solution here. You could have passed on the bills and hoped to achieve the value from them or you could have turned them in and got no value from them but either solution is a bad solution from a lot of perspectives. [11:10] AA: Well lets be clear. The one solution that really isnt available for you is to pass them on. That is a felony. If you knowingly pass on a bill that you know is fake, thats really bad news. [11:19] AL: Right. [11:20] AA: I dont see any scenario where thats a solution but youre absolutely right. You end up with no recourse and a nice lesson, I guess. [11:26] AL: Well thanks for sharing that experience with us, Andreas. Thats really interesting and again, you know, it just shows that this is growing up and everybody needs to kind of up their game when it comes to security because apparently, its going to be an issue. [11:36] AA: Youre very welcome, Adam. In recognition of this amazing show, you will be receiving a $500 donation in cash in an envelope. [11:43] AL: Woohoo. [11:44] SM: Just dont get it wet. [11:46] (Laughter) AL: Yeah, just dont get it wet. [11:48] SM: Just dont get it wet. [11:49] ______________________________ ANNOUNCEMENT: Youre listening to Lets Talk Bitcoin, the premier audiocast providing news and incites that cover the rapidly evolving world of digital money. Our twice weekly shows include analysis of late breaking news, updates on key technical, business and regulatory issues and in-depth interviews with the key people driving the new digital economy. Lets Talk Bitcoin offers sponsors an attractive way to reach a targeted and savvy audience. For more information, email sponsors@letstalkbitcoin.com. [12:34] ADVERT: More than 300,000 users, and counting, trust Blockchain.info. Its a Bitcoin wallet service and a wealth of Bitcoin information and is completely free to use. With a Blockchain.info wallet, youll get the convenience of a web wallet and the security of a desktop client. Blockchain.info is also a block explorer. You can use it to see Bitcoin transactions in real

time, check the balance of any Bitcoin address and view many handy Bitcoin charts, all for free. See what they have to offer today, at Blockchain.info. [13:08] ______________________________

AL: In our continuing series of conference interviews from the cryptocurrency conference in Atlanta, Georgia, today we are joined by Peter Surda, who is the primary at the Economics of Bitcoin blog. I actually should ask you this. What formal title or how would you like to be introduced? I know some of your projects but Im sure you have other projects. [13:28] PS: Well I... this is a difficult topic because I havent really... Ive had many job titles. Most of my life, Ive been doing programing and system admin work but I have a formal education in business administration. On the other hand, Ive also some law and economics in that and now people think that Im a Bitcoin economist so I decided to play along. Why not? [13:52] AL: Fair enough. That is what one of your business cards says. It says Bitcoin Economist. You write a lot about the Austrian school and youve been writing a lot about Bitcoin, so for our listeners, why is Bitcoin something that is desirable from an Austrian point of view at a very high level? [14:08] PS: This actually depends on which of the branches is concerned but the main branch, I will actually have that in my talk, the main branch basically argues that the ideal money is money that has an endless supply of base money and that there is full reserve banking. With Bitcoin, Bitcoin is a base, well wannabe money, with endless supply and it tackles the fractional reserve banking in an unexpected manner and that is, that there is very little demand for deposit banking, whats called. How the Austrians depict the fractional reserve banking, that its a combination of mediating loans and deposit banking. When t he deposit banking goes away, theres technically a full reserve banking because theres no.... the money supply is equal to the monetary base. This is an unusual thing that never existed before but I think Lawrence White, hes one of the Austrians, he made an argument that explains that this is an empirical issue. He might have thought that, hypothetically, something like that is possible. [15:24] AL: Theres definitely a divide within the libertarian community and sort of, as youve started getting into, as in the mindset. You know and how people look at libertarianism versus ... and how that influences, how theyre looking at Bitcoin. The stance that I take a lot of the time and I think a lot of people who I know take is that its very bad for the perfect to be the enemy of the good. If you sit around and wait for a solution that solves every single problem, youre going to be waiting a long time and that there are partial solutions out there. Is it ideological purity that has to do with it? [15:51] PS: This is actually a very interesting point because Bitcoin basically tackles this problem from a slightly different angle that has existed so far, at least in the minds of economists. It might not be perfect, like we know that there are all kinds of problems with it, but some of the problems that were thought to be either unsolvable or difficult to solve, it solves in a

very easy way. The question is actually what the correct combination of the features of ideal money is, because we probably cant have a perfect money that does everything in an ideal way but there are two questions. Which of the feature sets is more desirable than the others? The second one is whether that actually will work in reality and sustain itself? [16:43] AL: Do you think that the conversation is changing as we move forward in time? I mean, is the fact that Bitcoin continues to exist sort of disproving a lot of the scepticism? [16:51] PS: Youre actually taking stuff right out of my lecture. Basically, my impression is that its kind of like what is ascribed to Gandhi like first they ignore you, then they laugh at you, then they fight you and then you win. With Bitcoin, its kind of like first its being ignored and laughed at then economists simply say quickly that it cant work or it wont work but its still there. Then, the next step is they make reasons to explain why it cannot work but what happens next I dont know because most of the economists whose opinion actually Im interested in, they havent really made strong explanation or strong position regarding this. [17:39][ AL: Its been very interesting watching them, I think. You know, there are definitely some very prominent monetary scholars who you would think would have made statements, would have an opinion about Bitcoin or cryptocurrencies, but not so much sometimes. [17:52] PS: Yeah, actually because Bitcoin is difficult to understand if you dont have experience with IT. I can understand how an economist might be confused but, I actually, would appreciate more if, I value the opinion more or the posit ion if someone says I dont understand it so I cant really explain anything about it. Whereas, knee jerk reactions something like, It doesnt fit into some framework so thats bad. Thats not really a scholarly approach. On the other hand, if someone bugs you all the time...Say something about it, say something about it, you might not be able to handle it and say something. [18:34] AL: Ive got an economist here and Im really curious. You know, there are a lot of hot topics within the Bitcoin space right now and one of the debates thats going on is the question of whether or not the block size, the maximum block size needs to change or whether it should stay the same. This impacts the total transaction volume that were able to... you know, because if a block is a certain size and each transaction takes a certain amount of space, then you can only scale up so much, unless youre increasing the size of the block. There is some complexity to this. Whats your take on the issue? [19:06] PS: I understand that this is a ... in a lot of these difficult topics, when I first see it, I think its clear, its like this but then I think about it more and its not so stra ight forward. I think that the core dev. team they take a rather conservative approach and I think, with respect to Bitcoin, this is probably the better option. If you want to experiment with some changes, like the block size, maybe you can create a fork that is like, has different features and you try to merge the transactions into that and see how it behaves. What was his name? Peter, I think, the Belgian developer. In the conference, two years ago he said that they dont

want to make any changes because a lot of people have a lot of money in it and if something breaks, then theyre the poor guys who get the flack. Also, what we need to realise is that a lot of these things cant be really figured out theoretically in advance, and they need to be simply tested out. We need to see how it behaves in reality because its nice to m ake theoretical projections and models and so on, but there is a limit to that we cant predict everything. From this point of view, Im a supporter of all chance to experiment with features that make them different from Bitcoin and to try things that we are worried to put into Bitcoin at this moment. Maybe we can integrate it later. [20:43] AL: Cryptocurrency versus Bitcoin. What do you think is the innovation and what do you think, you know, in twenty years from now were going to be talking about? Is it going to be cryptocurrency or is it going to be Bitcoin? Or some other word that represents cryptocurrency? [20:56] PS: Well, in the short term, I think Bitcoin will remain the dominant one but as time progresses it will become more and more apparent whether Bitcoin or something else. At the moment, the differences among the bitcoins are not so .... from technical point of view, in my opinion, are not significant and in that case, liquidity plays the main role and Bitcoin is the most liquid one. I think, maybe only a handful of altcoins actually dont piggyback on the liquidity of Bitcoin because they dont really trade against the US dollar even. They just trade ... [21:35] AL: They trade against Bitcoin. [21:36] PS: Yes. This is an interesting thing because on one hand it makes more testing and more changes possible. On the other hand, it shows that Bitcoin really is an improvement because if it wasnt they would be piggybacking on the dollar and not on Bitcoin. [21:55] AL: Can they piggyback on the dollar? Its that, I mean, its that transition point. Its a difficult point. [21:59] PS: Its possible, as hypothetically if, lets say lets pick Litecoin because thats the next one. If its liquidity grows and markets build where you can trade Litecoin against the US dollar, Euro and so on, people start to accept it as a final means of payment in those situations where they normally accept Bitcoin, then yeah, it can shift around. We dont know that, its just as Bitcoin grows more, then it becomes less and less likely. Of course, theres the exception if there are some catastrophic technical problems... [22:32] AL: The escape valve clause. [22:34] PS: Yeah. [22:35] AL: Yeah. You know, what about improvements? You know, you talked about how the coins that are out there right now, all but a handful are very much derived from and dependent on, very heavily, Bitcoin. There have been sort of, you know pokes around, I mean Litecoin isnt a good example but Primecoin might be. It does something thats meaningfully different. One of the things that Ive been interested in, with regards to

altcoins, is the idea that because the penetration of Bitcoin is so small relatively speaking to the world population, theres lots of room for altcoins that dont even have innovations in terms of technicals just have innovations in terms of, you know, finding new markets to introduce themselves to. Instead of, you know, you see coins like Goldcoin doing this every once in a while, where theyll try to introduce themselves... theyll try to introduce cryptocurrency and hey, heres Goldcoin its the first one youve ever heard about. Why dont you buy it? I mean, to a certain extent, if you have a big enough and insular enough group, that could actually work, right? [23:29] PS: Yeah, I actually agree. I made the argument in this .... I have about one and a half pages about this in my thesis. This was long before this debate became polarised and I make the argument that if something was to overtake Bitcoin, it would either be because either it overcomes it based on the transaction costs which are these technical improvements or through liquidity. Liquidity can also be improved if theres like a special niche that makes it more... the altcoins make it first there, for example or there could be a company backing them, for example. There are a lot of possibilities about how that can happen but yes, it can happen. Just as Bitcoin grows more and more liquid, even though thats... I wouldnt actually say that thats the case necessarily.... [24:22] AL: Im interested if thats the case... why? [24:24] PS: The metric that I use in my masters thesis that doesnt indicate any decipherable direction where the liquidity is growing but I only use a very simple metric, so that might not be representative. Other metrics, like the number of merchants accepting it, the number of transactions and so on - these have improved, so thats also something that you can interpret as liquidity. What I do in my thesis is that I analyse the slope of the bid and ask order books on MtGox and those through the data that I analysed ends in November, last year. I didnt really look at it afterwards but its going up and down, so theres no clear path of it growing. There are a lot of, I would say, soft indicators that its growing but the real hard ones, the more mathematical ones there ... maybe it changed in the last year. I would need to look at it again and maybe I can do that when I have a bit more time. [25:25] AL: Yeah, only when you have a little more time. You just released your masters thesis and that was from the Vienna School of Economics, right? [25:31] PS: Vienna School of Economics and Business is the official title. I actually wrote it already in November, last year but I didnt really publicise it, I just created a blog about three weeks later and put it there. [25:44] AL: Was doing the research for your masters thesis what kinda kicked you into the Bitcoin space? [25:50] PS: That was together actually because I had to do a masters thesis and I didnt really pick a topic but this was around May 2011, which I dont need to explain t o people who are familiar with Bitcoin what happened then. Then I decided, hey, how about I do masters thesis on this. Thats how it all grew together. [26:14]

AL: Win, lose or draw, even if it failed at that point, you still would have had, you know, a good post mortem. [26:18] PS: Yeah. [26:19] AL: Ive talked with Jeffrey Tucker before about this and I am super curious for your thoughts. I am enamored with the idea that Bitcoin or another cryptocurrency could either be directly used as a national currency or could be used as the transparent backing of a fiat currency, that is essentially backed by it, and that would, you know, instead of having a serial number on it, would have a Bitcoin address on it and youd look at the Bitcoin address and it would show, you know, the total thats on it against how many its issued for. I mean, people think that thats really far-fetched but in the world that we live in today, I just kind of, Im wondering do you think that thats something that could work? You know, even with the system we have now? [27:03] PS: I think this is a highly hypothetical issue. 27:05] AL: Highly hypothetical. [27:07] PS: I suppose its possible but there are a lot of issues here, like it would need to be clarified how our transactions are processed, it would need to provide some way of moving Bitcoin users away from Bitcoin. Not replacing fiat users with a new fiat Bitcoin but moving Bitcoin users because if you just replace the reserves of the central bank and you continue to have a monetary policy on top of that and the banking system that we have now, that might make it more likely that the ... fiscally the state doesnt go bankrupt but it doesnt improve the financial system that much. [27:48] AL: Right. [27:49] PS: Its certainly possible and also what could happen is that Bitcoin gets included into the special drawing rights mix. [27:59] AL: Issued by the IMF? [28:00] PS: That this will be used as backing for fiat currencies. [28:05] AL: Do you think that thats as good a solution? [28:07] PS: Im not saying that its a good solution but Im just saying that this might be something that the politicians might consider if they are faced with some bigger problems like the collapse of the fiat currencies, for example. [28:23] AL: That implies that Bitcoin could live alongside of currencies in a way where its being paid attention to by the IMF and yet, all these other currencies still exist. Do you think that they are compatible over the medium to long term? [28:39]

PS: Well, compatible? I would rather say that the state has a lot of instruments about how to make it sure that its currency is still used or that it can continue execute monetary policy. Im not even sure even if everybodys using Bitcoin if that, necessarily, means the death of fiat. They could simply require that taxes are being calculated, or are being paid in fiat and that you need to do your accounting in the units of the fiat currency. That could, hypothetically, still keep fiat money alive. We dont really know exactly how this works, because we were never faced with such a situation. The most weve been faced, is when the whole system collapses and people switch to gold even though that doesnt happen that often, that was ... nowadays, that was more in the past. Nowadays, if a fiat system collapses, people switch to dollars or Euros. [29:39] AL: Switch to fiat. [29:39] PS: A liquid fiat money. People dont switch to gold, people so far, havent really switched to Bitcoin en masse. [29:48] AL: The problem with any commodity based money, where you actually have the money as a commodity, you know, I mean you solve the supply problem but you introduce all kinds of costs. Bitcoin is interesting, cryptocurrency is interesting in that, it sort of does both. It fixes the supply problem without incurring the costs of physicality in existing in real life. I dont know, theres not a question there. [30:14] PS: From economic point of view, what matters is how you achieve elasticity of the base money. Is that the production costs are roughly equal to the market price. That does not necessarily require a particular way of how to achieving the costs. With Bitcoin, its just electricity, yeah? With gold, its different. Its the cost of physically mining and transporting the gold to bank or to a mint. There are also other approaches, for example one that I find interesting is the proof of burn. This was developed by Ian Stewart, I think is his name. Thats basically a way of destroying one cryptocurrency and using that as a cost for creating a new cryptocurrency. Then you dont need to respend the energy, you can just spend an existing cryptocurrency as an input cost. [31:11] AL: Interesting. We are in the middle of a kind of explosion in terms of mining/hashing power and .... [31:18] PS: Out of the hashing projects that I either tried myself or invested in, I think out of four, only one is profitable and three .... I either lost money or will probably never recoup the costs. [31:32] AL: These are ones that are currently live projects? [31:34] PS: Some of them are. Some of them I liquidated. [31:37] AL: Do you think that theres a space in mining for anyone whos not able to invest five figures, you know, in a like monthly basis? [31:45]

PS: I wouldnt say its really investment. Its more about timing. I dont think you really need to invest much. Even if you invest much, if your timing is off, youll lose more money. I think this is now a highly competitive and highly risky endeavor. I cant really say who will be profitable but I think its probably misleading to concentrate on the amount of money invested. If youre a producer of mining hardware, yeah, that way you probably can earn money because everybody wants to buy them. If you are the miner, then Im a li ttle bit more sceptical. [32:19] AL: Its who you know rather than how much you can spend, right? If its about timing, that matters a lot. Also proximity then, also matters a lot too because if youre in, you know, Mongolia being shipped from China versus ..... This is a controversial topic. My continual concern has been that we are going to see a major centralization in mining because the manufacturing is centralized and because as the hardware is invalidated so fast, the only people who can afford to keep up, so to speak, are the people who can afford to make continuous investment. That leads to ... economies of scale basically come into play hugely when it comes to mining. It seems like thats not really ideal for a distributed network. [33:03] PS: I dont actually have a firm opinion about this. I understand the problem that on one hand, we need to have efficiency and on the other hand, we need to have decentralization and theres a certain level of conflict of these two interests. I think, over time, as we approach, the manufacturers approach the currently technically feasible limits, then the produced mining hardware will become more and more commoditized and that will improve decentralization. Nowadays, when its spiking so high and they are making more and more efficient ASICs, now its very tough and there could be a temporary less centralized or more centralized set up. I dont think that over long time this will last. Maybe, if there are some problems with patents, like someone tries to prevent competitors from issuing competing ASICs for patents, maybe that might slow down decentralization but over long term, Im not worried about that. Maybe Im wrong, maybe Im wrong. [34:11] AL: No, its fine. I mean its, again, this is a controversial topic. When I talked to, you know, when we talked to the developers about this on the core dev., the kind of response we get is that now doesnt matter so much because were solving the problem now, right? Were getting it down to the lowest common denominator and then once weve got this, you know, commodity level hardware thats so cheap to make everybody can have it, then itll start going into, you know, itll go into your car, itll go into your water heater, all this stuff. Its a problem where youve got the beginning, youve got the end but in the middle theres this like big, scary blank. [34:44] PS: I understand this point but my counter argument would be basically that we dont really know what happens in the middle, yeah? [34:54] AL: Right. [34:55] PS: We can be worried about what happens, yeah, but we dont really know whether it will be good or bad. [35:02]

AL: Given how fast weve moved, do you think right now were at the beginning or the middle? [35:06] PS: Based on my luck with the investment, I would rather say that I dont know. [35:12] AL: Well, I think with your investment maybe that means the middle because the opportunities were much easier in the beginning. You know, when there wasnt so much competition and now, I mean like, you know, the explosion of the hash rate has been quite impressive. [35:26] PS: I dont know if you noticed but there was an erotic novel or novel published about Bitcoin. I just bought it on my flight here. This is some funny stuff like, its about a guy who ordered mining equipment with Mosquito Labs and it arrived like, five years late or something. People are already making fun of this basically. [35:52] AL: That is one thing that we really havent seen too much yet and I feel a little bit surprised, I got to be honest with you. You know, there isnt a lot of fiction being written about any of these technologies. Like theres still fiction, theres still you know, cyberpunk fiction being written and all these things that are more in the future but nobody is really writing about ... you know, I mean I talk to writers some times and like hey... theyre like I want to talk about Bitcoin because I need someone to kill someone and I wanted to pay for it in that. I was like, You can use Bitcoin for so much more than that! I mean, how long do you think it takes culture to catch up to a shift like this? [36:23] PS: Im not really a specialist into this but I think that the novel that I mentioned earlier, thats a sign of a beginning. People will start to use this and we really eventually wont notice that there is anything special about it because Bitcoin will be considered normal. [36:42] AL: Normal. Normal is a very interesting word. We just saw the Silk Road probably made its demise and this came kind of shortly after one of its more out in the open competitors. People are paying a lot of attention to this but I think its almost for the wrong thing. I think that if this had happened, say six months ago or a year ago, then we would have seen a pretty major impact in the markets but I mean, outside of the initial panic, not too much happened. I mean, do you think that this shows that there is some robustness coming into the system? I mean, the same thing could have been said about MtGox. I mean, two years ago, when you were first looking at Bitcoin, you know, MtGox went through a freeze that lasted a week and it destroyed Bitcoin. I mean, like people were paralyzed and there wasnt anything anybody could do. You know, now when MtGox has problems, people just tick the exclude MtGox from the price on bitcoinaverage.com. What is this progression here were looking at? [37:38] PS: I think it shows that Bitcoin is becoming less centralized, that Bitstamp is a solid competitor to MtGox, that what is Blackmarket Reloaded is a solid competitor to Silk Road. [37:54]

AL: Does it matter that theyre solid competitors or does it just matter that there are alternatives? [37:57] PS: It needs to be easy to switch. Like there shouldnt be a vendor lock-in. When theres a vendor lock-in vendors, its difficult to move to another competitor. Thats not really decentralized. Now you can, even if your dollars are stuck at MtGox and you really need bitcoins, you just buy bitcoins and transfer them out and its done. [38:22] AL: But its more expensive. [38:23] PS: It is but you cant have everything perfect. If everything was perfect, then everybody would be using Bitcoin already for everything. Its a sign of improvement. We cant just think that well wake one day and every bitcoin will be everywhere, everything will be frictionless, there will be no problems with banks or, alternatively, no banks. People are trying to figure out how to compete, theyre trying to replicate the good things and not replicate the bad things. Theres also capital pouring in so this is basically competition. Even though it would be nice, on some levels, to have full proper decentralization built into the system, having centralized competitors competing against each other is probably the next best thing that we can have. [39:14] AL: Are there any other topics that youd like to cover or anything else? [39:17] PS: Yeah, actually. I wanted to mention my .... theres an altcoin which I find interesting. Its called eMuni. I dont know if it still exists. I noticed that it was launched and it uses a different technique than a blockchain. They call it a blocktree and it has the interesting aspect that its completely immune to 51% attacks. Theres no such thing as a 51% attack with it but it has other problems. For example, as if I understand correctly, there cant be any mining in it and if you have conflicting transaction, then the address is blocked. This is basically a method of preventing double-spending but there might be reasons where you want to create a conflicting transaction and override the old one. People are trying all kinds of things. I think, for example, how the 51% attack is viewed or treated is a bit misunderstanding because we dont really need to continue with the rule that the longest blockchain is the authoritative. There are methods of how to if you avoid this rule that you can prevent or, at least, mitigate the 51% attack. Research of 51% attack, I consider that an interesting topic. I dont know how relevant is that. I just think, intellectually, thats an interesting thing. [40:42] AL: Do you think that altcoins that have uses beyond currencies. I mean, a simple example of this would be Namecoin. A newer example would be .... [40:51] PS: Primecoin? [40:52] AL: Primecoin, well yes, yes, Primecoin but Im actually thinking theres another one that has basically a social network built into it, right? Where you can, its like a combination of Bitmessage and a cryptocurrency. [41:04] PS: I see, I dont know that one. [41:05]

AL: Its a new one, its called Florin coin, thats what it is. Basically, its not that its inherently social network, its that its innovation is that it has messages built into it. You can put, I think its 128 character long message and so with a message, you can do lots of stuff that people are already doing, or trying to do with Bitcoin. It just, then people complain that theyre putting junk into the blockchain because its not real transactions. You know, you mentioned that people, that the developers are reticent to mess with Bitcoin because its got peoples real money in it, so if something like this comes out and actually works, does that mean that it makes sense for Bitcoin to implement it or, it makes sense for it to be left to do its own thing and Bitcoin is this thing that people understand that its already stable? [41:46] PS: We dont really know that in advance. I, as an economist, would say that its an empirical issue. It could be that its more efficient and more useful if its a separate chain for a particular task, or it could be that its better to integrate it. I think Namecoin, for example, shows (Im not familiar with the other one that you said) but Namecoin I think, is a good example of something that really has a utility and that kind of makes sense to put it into a separate chain. [42:16] AL: As an economist, who spends a lot of time focusing on Bitcoin, why are Keynesians still winning the arguments? I mean, like when there arent often arguments, usually its just ignoring. Our world, largely speaking, is still being run on Keynesian philosophies and models, even though theyve been proven not to work over and over again. [42:37] PS: Economics is a very interesting field because its probably the only field where you can have the same facts and two economists agree on the facts but draw completely opposite conclusions out of that. I dont know exactly why Keynsians are winning but there are some arguments that it simply fits better into the role of a central bank to have a theory that explains the central banks are good and that they can control the economy and make it better. Whereas, lets compare with the Austrians, for example. The Austrians, all the branches that I know of, basically they say that this shouldnt be done in a centralized manner, so you probably wouldnt hire an economist to run a central bank who thinks that central banks are useless. [43:29] AL: Its self preservation and selection bias? [43:31] PS: Yeah, yeah exactly. [43:32] AL: Ok. I gotcha. [43:33] PS: There are other schools which are maybe not that widespread but that also support central banks like MMT, for example. [43:43] AL: Thats Modern Monetary Theory, right? [43:45] PS: Yeah. Im not an expert in this but if I understand it correctly, they do support a system where you have a central bank. Monetarists, some of them or most of them, also support a

way of executing monetary policy which implies a central bank because without central bank you have basically competition in production. The money supply becomes (endlistic ?) you cant execute monetary policy. [44:13] AL: Right. Is there anything else that youd like to cover at this point? [44:16] PS: I think that theoretical economic research of Bitcoin is lacking and economists should take it more seriously. They dont need to accept it, they just need to treat it seriously because a lot of them just treat it as something that should be ignored and shouldnt challenge existing views. What happens with Bitcoin in the future, that for someone who is interested in research, thats not that important. The important thing is that it already exists and that already challenges some of our assumptions and creates an interesting puzzle to solve. [ AL: It does continue to be a puzzle. Peter Surda, thank you very much for joining us on Lets Talk Bitcoin. [44:58] PS: Thank you for having me. [45:00]

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SM: Litecoin has been dropping a little bit recently. I keep an eye on the Litecoin price. I have a little widget on my phone and Ive been watching it since this summer. I remember in June, it was about 30 or 33 litecoins per bitcoin. That was like the ratio between Litecoin and Bitcoin and now its more like 60 litecoins per bitcoin, or more actually. Litecoins have been dropping in value relative to Bitcoin and then also in terms of the US$ price. Litecoins were closer to $3 each in the last quarter, I guess. Then recently, over the past couple of months and especially over the past couple of weeks, theyve been down below $2, just under $2. I wonder, you know, does this have something to do with Atlantis, the drug marketplace that kind of shut down a couple of weeks before the Silk Road shut down, the Pirate Bay accepted Litecoin donations, I think, before Bitcoin. [47:18] AA: They took Litecoin before Bitcoin? [47:20] SM: Yeah, or they were favoring Litecoin or something like that. Yeah, there are like definitely people who are Litecoin fan boys and fan girls out there for sure. Im not sure exactly why that is and Im not sure what the price drop is. Of course, you know, all we can do is speculate. We really dont know but do you guys have any theories? [47:36] AL: You know, if were going to be wildly speculating, there are a few things. First off, weve been waiting for MtGox to take on Litecoin and they have been talking since about June now, you know? Not really recently, but at that point before they had a bunch of problems, they were talking about bringing on Litecoin as the next tradable currency on the MtGox platform. Obviously, this was at a point where MtGox was, again, the trading platform so it was much bigger news and I think it would be if it happened right now. The question I always come back to is Does the price matter? I think with Bitcoin you can make an argument that the price doesnt really matter but I think that with something like Litecoin, the price kind of does matter because the price now is an indicator of where the price will be in the future since you dont have that fundamental utility to fall back on, in the same way that Bitcoin does. [48:22] SM: If you translate the Litecoin price, like Litecoin has been between $2 and $3 dollars in the last, maybe, six months. If it drops from $3 to $2, suddenly its lost 33% of its value. That would be like Bitcoin going from $100 down to $66. Thats a huge drop. Yes, I like that theory about just the kind of stalling of having Litecoin on different exchanges. You know, MtGox announced, I think they tweeted in July, Oh yeah, its going to be ready in July. Its already built into their API for Litecoin trading on MtGox. Then they said,Oh yeah, its going to be ready in September never came in September either. Now theyve got so many problems that it may never happen, so maybe people have just given up. Theyre less enthusiastic that Litecoin is ever going to be on any of the major exchanges. Even if it gets on MtGox, it may not be a major exchange by the time it does. There was another exchange called Litetree that was opening. They actually sent me a press release to my Lets Talk Bitcoin address and so I checked them out and it was supposed to be exclusively for Litecoin trading. I sent one litecoin into the exchange and I tried to sell it. I was getting error messages every time I tried to make a trade order. It just didnt work. It really just wasnt ready for primetime. At first, they had partnered with Dwolla and then they announced that Dwolla had cut them off. This was back a couple of months ago, at the end of August,

or something. There isnt really a big exchange to trade litecoin on. Theres not even a LocalLitecoins. You know, you could trade litecoins on LocalBitcoins but they dont have the escrow support for Litecoin in there yet. I think, maybe, youre right Adam. It is like an infrastructure problem. There are just not as many resources to use to trade litecoins as there are with bitcoins and maybe people are losing steam, as far as getting excited for Litecoin to come into more exchanges and stuff like that. [50:14] AL: Well, you know, I mean the thing that you could think about is that, if the market is a forward looking pricing mechanism, right? Then, if people thought that it was going to go up in value because of something like it coming on the MtGox to trade, then that means the price would have gone up well in advance of that happening. That means that the price, actually this might be a real price were looking at now. Whereas, for the last six months, weve been looking at an inflated price because it was with the expectation that those litecoins would then go up in value when they were traded in a more liquid market, like MtGox. I mean, I think thats the bigger question is Is this a real price or is this a deflated price from what a real price ...? I mean theres no way to figure this out but .... [50:52] SM: I think theyre all a real price. Also you could say that about Bitcoin too, right? Is a 150s whatever a real price for Bitcoin right now, or is it inflated, deflated, is there manipulation? People are always claiming manipulation in the gold and silver market and Bitcoin is kind of no different, and Litecoin too. I always sort of trust that whatever the price is, yes, thats the real price. Thats the average of a bunch of information that one person really cant know. Its a marketplace coming together and settling on a price point. [51:21] AA: The bottom line is here is that MtGox has really lost its ability to help any aspect of any virtual currency but it does occasionally take a dump in the punch pool and blow up a currency or destroy the value of an entire group of investors. You know, MtGox is really just flailing around breaking stuff right now. I think theyve lost the ability to help virtual currencies. [51:48] AL: I would tend to agree with that. The wrecking ball analogy really is true. It may have, at one point, been a functional thing but at this point, its just, you know, moving around wildly doing damage to everything it touches. I mean its funny, we talk about bitcoinaverage.com, you can on bitcoinaverage.com click a button and completely remove MtGox from the pricing structure and its the only exchange out there you can do that wit h. I think that says something. [52:13] AA: Theres a very thin line between being the life of the party and throwing up on grandmas shoes. [52:18] AL: Lets play out the logic for a second. What needs to happen for Litecoin to be able to get out from under the shadow that it seems to be under right now? You know, whether it be peoples expectations or a lack of utility or whatever. What actually would make this work? [52:34] AA: Survival. Yeah, both Bitcoin and Litecoin and pretty much any other virtual currency thats in this situation, all it needs to do to succeed is survive. Every crisis that doesnt kill a

currency and leaves it even with a residual value thats worth trading on a virtual currency exchange, for example with another fungible commodity or currency, if it doesnt kill it, it only makes it stronger. I think the same can be said for Litecoin. At the end of the day, the reason Im interested in Litecoin is a combination of interesting features and a founder, who has done all the right moves and continues to make all the right moves. Those are the reasons I invest in it. I think a lot of people are willing to wait around and see how many more hits Litecoin can take without collapsing, and thats value right there. [53:22] SM: I agree with you, Andreas. Im not selling my litecoins just yet. I think it might be an interesting buying opportunity. You know, we could see a bubble, perhaps, in Litecoin price if it actually does end up on one of these exchanges or if something like LocalBitcoins picks up Litecoin support and makes it easier for people to trade it but we have no way of knowing when or if that is going to happen. All I guess we can kind of do is keep using it if we believe in it, right? [53:45] AA: As a currency, it really proves the point that its primary value comes from good stewardship and governance by the founder. I think thats an important point. [53:54] AL: One of the things Im really interested in and after having this recent experience selling these Bitcoin video passes and using the bitcredit system, I really, really think that were going to wind up with payment infrastructures that are cryptocurrency agnostic, right? where it doesnt necessarily matter if youre funding with Bitcoin, or L itecoin, or whatever. I mean, pick your coin. Ultimately, they use the same types of infrastructures. The ways that you need to modify these systems in order to be able to accept multiple different types of things. Actually, the infrastructure, mostly, is the same. Its just the specifics that need to be modified and added to. I really think that Litecoin is in a situation that a lot of coins are in right now which is that, yes, its promising for whatever the reason is. In the case of Litecoin, I think the argument can definitely be made its about the development team and the community and the longevity because again, its had that secondary status now for a long time. Even, you know, right or wrong that becomes powerful. Its about being able to find ways where you dont, as a new altcoin have to go in and convince every vendor again Hey, I know you already accept seven cryptocurrencies. Heres another one that you should accept. Here are the reasons why. It needs to all be one packaged solution that vendors, or people, can just integrate and accept everything. That will, I think, truly let the market exist on its merits rather than existing on depending on Bitcoin or any of these other scenarios that we see people using out there right now. It has to be about using the currency as the currency. [55:18] SM: Its kind of like what we talked about before with the counterfeit $20s versus the ones that came from the Federal Reserve. If people believe in it, then its got some value. Very similar to that, to Bitcoin and Litecoin and other cryptocurrencies, as well. Its an interesting opportunity right now because the Feds, apparently, have seized you know, on the order of probably 7,000 bitcoins from the Silk Road. Then theres another .... how many bitcoins is it? Several million, its something like $80 million of bitcoins that are locked up in this wallet that only Ross Ulbricht has the key, allegedly to. Potentially, that is a huge percent. Thats like 5% of all the bitcoins that are out there right now that could be just gone. Like, taken off the table, off the market. You know, maybe those will be locked up forever. [56:05]

AA: Thats great! [56:06] SM: Yeah. I think thats great too because then it will increase the value of the remaining bitcoins. Will some people turn to stuff like Litecoins and other altcoins because its just that bitcoins are in such short supply and theyre going up so much that maybe well want to look into some alternatives, I dont know but I think it will be interesting to see. [56:24] AL: I think the divisibility of cryptocurrencies make this a sort of mute point. [56:29] SM: Theres always that psychological aspect though. People want one bitcoin or two bitcoin. 0.002 is just not the same as, you know, a quarter or a nickel or whatever, right? [56:40] AL: Youre right. Its totally a perception thing but at the same time if I can buy something worth $50 for, you know, 0.4 bitcoin then. Im just saying that math cuts both ways and the perception is definitely there so that when youre buying them you feel like youre not getting a lot for your money but then youre spending them and you feel like youre getting a lot for your money. [57:00] AA: Im fractionally rich! [57:02] AL: Exactly. That does bring up an interesting question. Do you think that there is a future out there, either of you, where people are using fractions of bitcoins and being happy about it? Like thats just the normal part of life. Where instead of having it be $20, its 0.02 or 0.002? [57:23] SM: Maybe we can harken back to Lets Talk Bitcoin Episode 1 and talk about the switch to milliBs. That could happen sooner rather than later. I also get it that its just another thing to explain. Like, if someone doesnt know what Bitcoin is and theyre just introduced to the concept and then youre like, Oh, by the way, when you go to buy a cup of coffee, its not really a bitcoin. Its like youre sending 2 milliBits or something like that. Thats an extra layer of confusion for them and theyre more likely to throw up their hands and say Ah, this doesnt make sense, you know. [57:53] AA: What is this, drachmas? [57:54] AL: Maybe its not the nomenclature thats the problem, so much as it is the pace that were on right now. You look at the way that Satoshi laid out mining and distribution of the currency and I think that by the time we got now five years into the life of Bitcoin, I dont think it was expected to be quite as popular as it is. I dont think the price was expected to have appreciated quite as much as it did. I mean, it seems like we have a series of tipping points in our future, where well pass a certain threshold that we cant even begin to describe or identify right now and a whole other set of groups are going to rush into it and the price will go up a lot more because of that, because of that enhanced utilization and utility. If that same progression took twenty years, would it be a big deal to be talking about

these decimals or would it feel like more of a natural deflationary process since its happening over a long period of time? [58:42] AA: Theres nothing natural about this process right now where were experiencing hockey stock growth on pretty much every parameter in Bitcoin. At the moment, were in the explosive phase and Bitcoin is expanding faster than some of its feedback loops and that leads to volatility. Thats fine. I was watching, just yesterday, a show from January 2012 a TV show called The Good Wife, which is a legal drama and they had an episode about Bitcoin. Who is Satoshi? It was interesting just because, having taken place in January 2012, the entire episode was based around a $3 per bitcoin price point. The conversation was so different than what youd envision it to be today so its nice to travel back in time a nd see how much things have changed in just a year and a half. [59:30]

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AL: Thanks for listening to Episode 51 of Lets Talk Bitcoin. Content for todays show was provided by Stephanie Murphy, Andreas M. Antonopoulos and Peter Surda. Additional editing was provided by Matthew Zipkin, on location engineering by Chrystal Levine and music was provided by Gerard Rubens. Video conference passes are now available with the introduction and keynote by Jeffrey Tucker and the first hour long panel available for free. For nearly six hours of conference talks, lectures and speakers visit bitcoinvideopass.com. [1:00:03]