Earlier this month, I sent out my first newsletter, Understanding Crypto, where I explained why I think we should understand the blockchain paradigm shift. Since then, I’ve had a myriad of conversations with friends that have helped me understand where your minds are. Now when I go with pals for drinks, I find the conversation veering into this subject matter. Sounds dull? Not at all! It is fun to rip the band-aid off and come clean with questions. My overall observation? We are all befuddled, and that is because this is confusing! I read somewhere how it was much easier to understand the internet and its applications because they were more “real world” than the crypto space. Think about it: when Uber was launched, it was semi-easy to wrap our heads around combining mobile technology/ GPS/ and cars— because we all knew what taxis were. But blockchain and cryptocurrency are novel ideas. In this newsletter, I’ll try to address some of the most common questions you’ve asked, give a bit of background on Bitcoin, and then address some pretty mind-blowing Bitcoin events in recent news— so please stay till the end.
First- a visual on how to think about blockchain.
In one of the podcasts I recently heard, Naval Ravikant and Nick Szabo lay out a mental metaphor that I love: we are asked to think of the essence of blockchain as a fly caught in amber. This phenomenon is found in nature and helps scientists to analyze ancient insects since once the fly is trapped, it is “frozen” in time- forever. Amber is a hard, golden material that oozes from tree resin. Attracted by the resin's smell, insects get trapped in the sticky substance and are preserved as the resin hardens. Now, let’s take that idea and apply it to the blockchain: the “insect” is the unmovable code and the amber is the computing being performed, layer upon layer, each time miners perform their work. Each layer added to the amber makes it further unchangeable. In essence, the blockchain is a powerful ledger of the truth: the longer the fly has been trapped, the thicker the amber and the more you can trust it is what it originally was. There are chains of computers dispersed around the world holding code (think: the fly), and as more computers solve for algorithms, or what is called mining, the chain becomes increasingly difficult to tamper with. I thought this was helpful— let me know what you think.
Now, let’s understand Bitcoin a bit more…
Bitcoin was created in 2009 on the heels of the economic crisis of 2008— it is easy to see the link between bank’s bailouts and a need for decentralized but trusted money. A mysterious and pseudonymous Satoshi Nakamoto designed a system combining computers with cryptology that outlined a new currency’s protocols utilizing a blockchain. I’ll go into all of this more in a bit, but an easy way to grab ahold of it is like this: bitcoin is to the dollar as miners are to bankers as cryptologists (in this case Nakamoto) are to the Fed. The blockchain, then, is just the system where all of this lives and the fact that there are *so many* computers storing the same information makes the whole thing trustworthy. Anyone—whether they run a computer tracking Bitcoin (they call these individual computers “nodes”) or not— can see these transactions occurring in real-time. Bitcoin has around 10,000 nodes (that’s a lot!) as of June 2021, and this number is only growing, making an attack quite unlikely. Lots of you have asked what would happen if a hacker attempted to meddle— what would happen to the value of Bitcoin? If someone tried to attack the Bitcoin nodes, the Bitcoin miners would, in essence, referee. I’ll go into that once I better explain miners.
What in the heck are miners?
The concept of miners can be mystifying. Miners are simply individuals or companies solving computational algorithms. Essentially, they discover a solution to a complex computer puzzle, and as a result of their effort, they are rewarded via the release of new bitcoins. These miners act as a decentralized authority enforcing the credibility of the Bitcoin network— as I said earlier, they act as how bankers behave with cash today. So, as to the earlier question on what would happen if a hacker tried to meddle with some code? The thousands of miners would likely move to a new blockchain— or “fork”, therefore rendering the attack useless. This is why Bitcoin is essentially a proven concept at this point: enough people trust it.
New bitcoin are released to the miners at a fixed but periodically declining rate. As of June 2021, there are over 18 million bitcoin in existence and less than 3 million bitcoin left to be mined. So, in the Bitcoin protocol, the scarce piece is the bitcoin itself. Anytime there is a new computation, the historical code gets trapped in the amber again like the fly and no one can undo it later. Hopefully, the fly trapped in amber metaphor, with layer upon layer being added to it helps conceptualize this better.
Is Bitcoin poised to be another Dutch tulip market bubble?
I love this question, first of all because I had to go back and research what this actually was. I have always associated tulips with the Netherlands with no idea as to why! The Dutch tulip bulb market bubble was one of the most famous market bubbles and crashes in history. It occurred in Holland in the 1600s when speculation drove the value of tulip bulbs, seen as exotic fauna at the time, to extremes. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person's annual salary, as hard as that is to imagine! Now, here’s why folks think Bitcoin is different. If you think about it, money has been around for centuries. First, people traded shells and other objects found in nature. Before the leap to fiat money, i.e. printed money on paper, people traded gold and then we moved on to coins. At one time, the USD was tethered to gold— but now no longer. Now, we believe the USD’s value because, essentially, trust. I accept U.S. dollars as money because you accept U.S. dollars as money and so on and so forth. If we all believe tomorrow that tulips were valuable again, we’d be trading in tulips. But tulips are lousy to store, trade, transport, and subdivide. Bitcoin is not. Think about it: trading money digitally without any central figure is quite simply the easiest way to trade currency.
The question regarding regulation
So many of you asked me if I thought the US or China or whomever, really, would step in and regulate crypto. There is a lot of unknown around this! But, last week something remarkable happened in South America. Seeing other countries’ reactions, and the US’ non-reaction is worth noting.
¡Viva Bitcoin!
Last week, Miami hosted Bitcoin 2021- the largest Bitcoin conference to date. There was a lot of excitement, but the biggest news to come out from it is nothing short of historic. The millennial President of El Salvador, Nayib Bukele, announced that his country would pass a law making Bitcoin *legal tender* of its country. That’s pretty amazing if you think about it: a country of approximately 6.5m people, 70% of which don’t have a bank account, but most of their citizens own a cell phone will use Bitcoin, along with the USD, as legal tender. This might sound completely random, but El Salvador seems to have made this leap because of the US’ recent inflationary policy. El Salvador, like many Latin American countries, is tethered to the USD.
This announcement will bring unprecedented economic opportunity into a country formerly known for its murder rate! I have to think that Bitcoin companies working on crypto projects will most likely flood into the country. Over Twitter, the President announced that entrepreneurs worldwide only need to invest the equivalent of 3 bitcoins to gain residency into the country. He also casually tweeted that El Salvador plans on harnessing geothermal volcanic energy to power the energy-consuming mining done by computers. Zero emissions— and cheap too! Suddenly on Twitter, you saw politicians from Paraguay to Mexico changing their profile to “laser eyes” (this is just a symbolic way of showing your enthusiasm for Bitcoin).
Here’s my favorite part about this piece of news… it is exciting to think how cryptocurrency might not be just for the rich. It could be the beginning of proving how cryptocurrency could be an engine for economic empowerment for people in the most underdeveloped countries, who have access to phones but no access to banks— and limited economic opportunity. On various work trips to Kenya, Ghana, and Tanzania in 2010/2011, I remember being struck by M-Pesa, a mobile banking system widely used in Africa, which was light years ahead of anything similar in the US/Europe at the time. Thus, we’ve already witnessed widespread adoption of mobile banking in the developing world— over 10 years ago! But, and this is key, a lot of value is lost with intermediaries- something which is avoided with crypto due to its decentralized nature. In the case of El Salvador, economic stimulus coursing into the country via crypto-related business will no doubt trickle down, or rather, flow into the digital wallets of its citizens. Now, things are really getting exciting and we can witness history in the making!
Thanks so much for reading and discussing this subject with me, I love hearing your questions, thoughts and suggestions. Please feel free to forward this to someone to whom you think might be interested. See you next time!
-Susan