November 2023
Nik explains that Bitcoin is both a software and a unit of account within the software. The unique innovation Bitcoin offers is that people can use and move these units without a central party (like a financial system or government authorities). This makes it resistant to censorship and interference. Bitcoin miners constantly have their computers on to secure networks and create blockchains that give Bitcoin value. Many Bitcoin investors see it as a hedge against inflation due to its store-of-value properties, like gold.
They also discuss how U.S. government legislations have been pro-Bitcoin so far, as the SEC just approved a Bitcoin futures ETF and states like Wyoming have created a favorable regulatory environment for blockchain companies. However, it is important to conduct proper research on Bitcoin and consult experts before considering it as an investment.
Stay tuned for more episodes from the Investor Symposium like Lending to Out-of-Favor Companies with Substantial Assets and A.I: Possibilities and Pitfalls of Artificial Intelligence!
Watch previous episodes here:
Ep. 60 Across the Pond: Navigating the Expat Financial Journey
Ep. 59 Top Wealth Hacks and Tax Strategies in 2023
I'm excited to talk about this topic because it would be very hard to talk about the world of investing without talking about Bitcoin. Seeing is it's a very new emerging asset class. I want to warn you, we're not like waking up tomorrow and going and buying Bitcoin. We think that gold is a good store of value, a way to hedge against inflation and money printing.
But we are so lucky to have an expert speaker to talk about bitcoin with Nik Bhatia. You can't ignore the fact that it's out there. People are interested in it, they're hearing about it and they want to know more. So that's why we're here to highlight it today with Nik. He has a lot more accolades to his name than I do.
So I'm going to list them off. He is a professor at USC, but there's a long family history, history associated with that as to why he does it. He's a CFA charterholder, which is probably the hardest designation to get in our industry. He used to be a fixed income specialist. He is the founder of The Bitcoin Layer and the author of a book called Layered Money that talks about this emerging asset class.
And we're so excited to have him as a guest. Nik, thank you.
Thank you, Chris. Thanks to everyone for having me. Appreciate it.
We also have Brian Standing. Brian Standing is a wealth planner at Morton Wealth. He's been a practicing estate planning attorney for about 15 years. He is turned into an investment dork just like me, and that's why he's here. But not only does he like investments, he loves the world of estate planning. He's very interested in technology. He used to be very into video games, which led to his passion around crypto and Bitcoin.
Something might be wrong between us if you're not giving me too much of a hard time. That was way too nice. So anyway, thank you for that. I will be asking some questions and maybe playing along. You know, I thought you were going to give him a long deserved introduction and then say, you know, Brian's just happy to be here.
That's true.
I thought about it. I mean, you have more initials behind your name than your name is long. So I think that that's.
I appreciate that. So. Do you want to jump in? Yeah. Start the questions. Okay. So I think what makes sense, especially for this audience, would be to say, what? What is it? What is Bitcoin? Right. We know it's a thing. It's a network. There are bitcoins. These are apparently units of some kind of value.
What is the difference? What does it mean? What is Bitcoin?
So I'm going to hijack here one of the next questions and just answer them both at the same time. Because one of the next questions that Brian is going to ask me is what is crypto? What? What is Bitcoin? What is crypto? And so let's just start there. What is crypto? Crypto today is the short form of a word called cryptocurrency.
But before 2009, the word crypto was the short form of the word cryptography. So that is has to be understood at the beginning here that the word crypto is short for cryptography, not crypto currency. The word cryptocurrency is a relatively new word, and the word crypto is many, many decades old. Goes back to the fifties, to the seventies, depending on how you want to classify cryptography.
So think about the word crypto, not as the mainstream uses it short for cryptocurrency, but as short for cryptography. The thing Bitcoin refers to two things. It refers to a software, something that you can download onto your computer. And that software came from an academic paper proposed with a software solution to a computer science problem.
And that problem was the transfer of information without a central party. Now, in 2009, Bitcoin was created and introduced as a software, and within that software there is a unit of account like dollars or cents. But in this software, the unit of account is now also called Bitcoin. So bitcoin, the word bitcoin means the software called Bitcoin and the money within that software, which is also called bitcoin.
So when you see the price of Bitcoin, what they're referring to is the price of 1.0000 Bitcoin within the Bitcoin software. So that's what Bitcoin is. Then people started to use the word cryptocurrency after Bitcoin came out a couple of years later that got shortened to crypto and then a million people tried to copy, duplicate, improve bitcoin and created a new crypto industry.
But we'll talk about today is that industry and the original innovation which is called Bitcoin are quite different things. I'm focused on Bitcoin, the computer science solution to a problem called the Byzantine Generals problem, which was basically how do we send information without a central party? People had tried to solve this for decades. It was finally solved in 2009.
And guess what? You can't resolve the Byzantine generals problem, and that's why Bitcoin stands alone and is very unique and it's a new asset. And the rest of crypto actually is something that I want to warn people from the beginning in the first 5 minutes of what is Bitcoin? Crypto and Bitcoin are not the same thing. And in crypto you will find all the dangerous scams and the new wave of tech innovation hype that might be very dangerous to investors.
That doesn't mean Bitcoin is safe, but that is something that we have to establish right here at the beginning.
Yeah, no, I appreciate that. So I think something to consider is to kind of highlight what is the value proposition then for bitcoin, right? It's not as a cryptocurrency if all of these are cryptocurrencies. So what is it that is important or different about Bitcoin that people should know about when they're comparing to this, when they see blockchain, when they see all these fancy token names?
What is the real value and is there value in these other tokens that has that has been improved in some way? Is there something missing that Bitcoin has that where they're taking shortcuts in some way? How are we to make sense of all of these different options? When we started with Bitcoin and now we have 10,000 crazy meme coins.
Yes, it's it's hard to qualitatively describe the difference between Bitcoin and everything else without explaining the word blockchain. So that's another word that people have heard a lot. But blockchain has also taken on a new meaning. The word blockchain means a chain of blocks. I'm not actually.
It's very technical.
And the course that I teach- I teach two courses at USC. I teach a bond market course because I'm a rates person. We could have done this whole panel on interest rates, but this is a Bitcoin panel.
And he's probably the most optimistic bond person I've ever met in my life.
Rates will probably come back down over the next couple of years and everybody's worry will start to go away. Yes. Yes. Not yet. Definitely not yet. But the the interest rate course that I teach at SC, I've been there for about five years teaching that my new course is about Bitcoin. I named the course Bitcoin and digital assets.
The university messaged me back and said, This curriculum looks great, but we think you should change the name to crypto currency.
And so I because no, they said because we don't know what the future of this industry is. So why call it Bitcoin when we're not really sure yet? And so I replied, No comma. The reason it's called Bitcoin is because if you look at the curriculum, I'm teaching six or seven papers that are about Bitcoin, the and digital assets part of the course is because I teach the evolution of some cryptocurrencies and stable and other types of digital assets, including stablecoins and the potential use of future central bank digital currencies.
To answer, go back to your question. The word blockchain means a chain of blocks. The word block and the word chain then are the first lecture or two lectures of my course. We go through how Bitcoin's software works. It is a chain of blocks blocks our transactions. That chain is the process that they're linked together. And in that way, my students over three, four or 5 hours of lecture are able to understand and what is a chain of blocks.
And when you understand that the chain of blocks originates from something called Bitcoin mining, who is heard of Bitcoin mining, who knows what Bitcoin what, who knows what it actually means? What does that mean? Right. So you've heard of Bitcoin mining, but you don't know what it means because the process of mining is this computational process that secures bitcoin and gives it value.
So when I was learning about Bitcoin and I understood Bitcoin mining for the first time, that's when I said, my God, this has value because it is a network of computers that maintain the ability to use that unit that I told you about and to use that unit without a central party. And the only way they can move money around the world without a central party is because these miners have their computers on all the time.
And the miners that have their computers on and secure the network and create this chain of blocks gives it value for me to be able to explain why that is. The case might be beyond the scope of 20 minutes. But I think people should understand now, too, that the question isn't Bitcoin or crypto in our world. The question is invest in Bitcoin or invest in Bitcoin mining.
Do you want to be involved in just the asset or in the production of the asset? And now companies that are processing generative AI with their graphics cards and you guys know that in video is one of these magnificent seven? Why is NVIDIA one of those companies? Because they make the chips that process the future artificial intelligence companies like NVIDIA are making or people that are purchasing chips from in video are now making the decision should I be doing generative AI chips or Bitcoin mining chips?
How should I dedicate my electricity and my power? And so what is the value in Bitcoin is your question? The value is in what is Bitcoin mining, which is the creation of these blocks. And the creation of these blocks gives us the ability to transfer money around the world without a central party has never been done and there is no other cryptocurrency that can be invented that does decentralized currency in a better way.
There have been thousands that have tried. We have actually empirically and mathematically prove that essentially all of these attempts to copy Bitcoin or improve upon Bitcoin do fade relative to the price of Bitcoin.
So one of the things that we talked about long time ago, I think on the original podcast was you're kind of against it when people call it a cryptocurrency or Bitcoin a cryptocurrency because it's a way to volatile to be a currency and it's more of an asset. Would you expand a little bit?
Sure. So Bitcoin is a currency because you can send it to and from. Right? The word currency comes from current and electricity can travel via current just like money can. So bitcoin is definitely a currency in that we can use it, but it, it is very unlike a government currency because a government currency is almost a balance sheet operation.
Right? And bitcoin is a virtual asset or a digital asset, a virtual commodity. These are all terms that I think better describe what Bitcoin is, that unit of account within that software. So cryptocurrency is not a complete description, although it's and it's not an inaccurate one.
Yeah. So we've got, you know, five or so minutes. I want to hit some of the topics where if you've only seen headlines of Bitcoin, this is what you've heard about it. And then maybe kind of a little bit rapidfire, get your take on this just to give it maybe another perspective. So the first thing that we've seen, even Charlie Munger has said they'll find a way to make more bitcoins.
Right. And we know or we might be learning today that this is open source. Anyone can change the code, anyone can do whatever they want with Bitcoin. So how is it that there will only ever be 21 million bitcoins? What are the you know, without getting too technical, what are the mechanics behind that? Why is that true?
Sure. So maybe, you know, some people in here have played Pac-Man or Madden. And when you design a computer software, you design a game, you have a maximum points, a maximum number of levels. You write it into the software and you published it. And that's the software that people download on the software that people downloaded. Starting on January 3rd, 2009, there were only going to be 21 million Bitcoin in that version of the software and that Bitcoin would be introduced to the supply 10.5 million over the first four or so years and 50% of the supply would be gone in four years.
Then another 50% four years later. Today we're at approximately 19 million out of 21 million and that's schedule that was in the original software has been upheld. So how do we know that it won't be more than 21 million? We only know that every 10 minutes that goes by, everyone that has the Bitcoin software has agreed to those rules.
Now, one thing that I'm I believe is important and almost nobody in this room might, you know, know about it is that on August 24th, 2017, so about six years ago there was an update to the Bitcoin software. This update was called Segregated Witness, and there was a fight, a battle over the what type of software fix additions would go into Bitcoin between 2014 to 2017.
And when this moment happened in August of 2017, several things actually happened for Bitcoin. One of them was Bitcoin established its ability to fight back against corporate control because there were corporations trying to make a change that didn't end up happening. Second is that the Bitcoin users are actually in control. So if they say no to supply increases, we have a concrete example in history of why that will never happen.
And I know it's just one, but if you go back and learn about that era in Bitcoin, it's it's it's a fascinating time and in its early history, a period in time we can say we can see that nobody controls this thing. Bitcoin is not a company. I should have said that at the beginning. Bitcoin is not a company.
It is not there is no address, there is no jurisdiction of Bitcoin, there is no server farm that a military could bomb and take down the network. There are no ten locations that militaries could bomb to take down the network. It is like the internet where it is living in millions of places at once and cannot be stopped and is not controlled by anybody.
So your biggest risk is just another username and password. Everybody likes that, right now.
That's helpful. It's it sounds like the the structure is such that there are incentives not to change. Right. If you were to try to change it, you would probably face economic damage by doing that. Right. So one of the incentives, if you're going to spend the energy, which is another thing that we hear, is it takes a lot of energy, right?
You're only going to spend that time, that money if it is valuable to you. And so, you know, reducing the value of your Bitcoin by, you know, increasing the amount would probably not make sense. So there's some incentive behind some of this. I want to make sure to hit because this is a big one for a lot of people that what about governments?
What about, you know, the people getting together and saying, you can't use this here, we're going to penalize your use of this technology. We think it's unsafe. We think there's illicit activity. How would you address the question of can this be banned?
Sure. Yeah, to be very frank, long ago, long ago concluded in the United States that the United States is a wildly pro Bitcoin country. And this is despite anything you might hear from a single senator from the New England region, there is no anti Bitcoin effort in the US federal government. There is an acknowledgment from the IRS in 2014 that it's virtual property as will be taxed and capital gains.
CFTC, the commodities regulator 2015, called it a virtual commodity. The SEC approved a Bitcoin futures ETF. Futures have been trading on the CME since 2017. For Bitcoin, there is a dynamic legislative framework in Switzerland and in Singapore. There are dozens of states in the United States where there's pro bitcoin legislation going on and you guys know with you know, just checks and balances, balance of power, state versus federal.
There is no anti Bitcoin movement from the U.S. government, full stop. There might be individual politicians that have a lot to say. But if you look at the proof in the pudding, we are a pro bitcoin nation.
Nik, thank you so much for joining. Thank you very much. I know that people can follow you at The Bitcoin Layer. You can pick up your book Layered Money. You're working on your second book and you're nice enough to be able to stick around here for another hour or two and answer questions. So thank you for your partnership and help.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
