Podcast Summary: Hidden Forces – "The Rising Price of Bitcoin, ICO's, and the Economics of Cryptocurrencies"

Host: Demetri Kofinas
Guest: Gil Luria, Director of Institutional Equity Research at D.A. Davidson
Date: September 3, 2017

Overview

In this episode, Demetri Kofinas hosts Gil Luria—one of the earliest sell-side analysts to cover Bitcoin and blockchain—to explore the macroeconomic and regulatory perspectives on cryptocurrencies. The discussion covers the evolution of digital payments, the booms and busts in Bitcoin’s history, mining economics, technological innovation in blockchain, commodity market analogies, regulation, tax, and the rise of ICOs.

Key Discussion Points & Insights

Gil Luria’s Background & Introduction to Bitcoin

• Gil's entry into the space: Began covering fintech and payments companies; approached Bitcoin with skepticism, but was struck by the Satoshi white paper’s elegantly engineered solution for trustless value transfer.
  • Quote (Gil Luria, 01:36):
    “I did the right thing, which is to read the original Satoshi Nakamoto white paper and light bulb went on over my head. It is a very eloquent and clever and brilliant representation of how to solve a problem that exists in many parts of the economy... I found the Bitcoin solution to be very elegant and have been involved in following it ever since.”

The Evolution of Digital Payments Pre-Bitcoin

• Banking relationships have shifted from physical cash to fully digital, mobile-transacted money.
• Cards (credit and debit) and electronic means replaced physical transactions—but fees and economic tolls remained high, especially for cross-border payments (03:26–05:54).

Bitcoin’s First “Winter” & Rise of Ethereum

• The 2014–2016 crash was significant:
  • Bust cycles are natural to Bitcoin's adoption; the momentum-driven, friend-to-friend growth and subsequent unwinding shape the price spikes and crashes.
  • Developer attention shifted from pure speculation in Bitcoin to innovative projects like Ethereum.
  • Quote (Gil Luria, 07:04):
    “There have been several hype, boom and bust cycles already. It’s a feature of the way Bitcoin gets adopted... The supply of bitcoin is fixed and visible. The change in the demand is dynamic and momentum driven. It’s a friend brings a friend.”
• Ethereum’s emergence (ICO in 2015, developer growth in 2016) added functionality and a new wave of interest, particularly through ICOs (10:32–11:04).

Bitcoin as a Commodity: Price Dynamics vs. Traditional Commodities

• Similarities: Economic incentives for miners; higher prices drive more investment in mining equipment, and vice versa.
• Differences: Bitcoin mining equipment has a rapid depreciation cycle (weeks, months), unlike the multi-decade investments in oil or gold mining.
  • Quote (Gil Luria, 14:47):
    “The life cycle of the transaction processing equipment is measured in weeks and months as opposed to in generating other commodities could be depreciated over 10, 20 years. And so there’s a layer of the microeconomics that’s mostly unique to Bitcoin because of the very, very short life cycle of the transaction processing equipment.”
• Bitcoin’s incentives allow the network to self-stabilize amid price shocks (12:15–15:36).

Proof of Work vs. Proof of Stake; Bitcoin’s Robustness

• Luria distinguishes between proven and theoretical mechanisms:
  • Proof of Work (PoW): Robust, battle-tested, “astounding” achievement in peer-to-peer, distributed trustless value transfer.
    • Quote (Gil Luria, 16:41):
      “Proof of work has been proven to me one of the most revolutionary changes in both computer sciences, mathematics and economics. The success of Bitcoin, to me is remarkable.”
  • Proof of Stake (PoS): Mathematically promising, but unproven in adversarial environments.
    • “Until I see it working, until they’ve gone through years of being attacked under a proof of stake regime and it survives and works... I’ll give it the same credit, but we’re not there yet.” (18:44–20:06)

The Price and Function of Crypto Assets

• Bitcoin’s value as “fuel” for the network is analogous to oil for engines—but the analogy only goes so far.
• For users, network utility trumps spot price; most current activity is still speculation and investment.
  • Quote (Gil Luria, 21:06):
    “Bitcoin to the Bitcoin network is as oil to the gasoline engine network of vehicles. ... Eventually it’ll become transparent. I believe that government currencies will survive bitcoin... At some point bitcoin is going to go to the background.”
• Bitcoin’s economic purpose (payments) remains largely untapped in practice (21:06–23:37).

Bitcoin, Blockchain & the Future of Payments vs. Trust-based Industries

• Luria frames Bitcoin as a “crypto asset,” separate from government currency.
• Sees blockchain technology revolutionizing trust-creating industries (banks, lawyers, accountants) beyond payments, but not necessarily via Bitcoin itself.
  • Quote (Gil Luria, 24:02):
    “All those entities are there to create trust for transactions in any other type of asset. And those entities I believe will all be either served by or replaced with a form of blockchain technology that may or may not be Bitcoin.” (24:02–26:20)

Blockchain Network Effect & Consolidation Prospects

• Bitcoin's network in payments is difficult to displace—massive investment in transaction processing equipment and a proven software track record give it a defensive moat.
  • Quote (Gil Luria, 26:51):
    “It’s going to be hard, not impossible, but hard to displace the robustness of the Bitcoin network for these particular applications. I think we have seen a network effect for that.”
  • Track record, reliability, and low cost set Bitcoin apart in payments, whereas Ethereum’s versatility comes at a higher computing ("fuel") cost.
    • “Ethereum can do it, but it’s like bathing in spring water. It wouldn’t be a good use of the Ethereum compute power to move a penny to pay for a video online.” (29:59–30:33)

Regulation & Barriers to Entry

• Luria dispels the narrative that regulators are “out to get” Bitcoin; authorities have mostly applied existing financial frameworks to crypto players.
  • Quote (Gil Luria, 32:08):
    “I don’t think the government was ever out to get either bitcoin or blockchain... There was an honest, genuine effort. And in fact, I would say that it was accommodating for a very long time.”
• Biggest issue: High regulatory compliance costs, which hurt startups compared to incumbents.
  • Quote (Gil Luria, 34:21):
    “The approach... by most governments in the west was, let’s just apply the same framework. ... The problem is that as a startup, you have to then comply with the same regulation that those big guys are spending hundreds of millions of dollars on with your startup resources.” (34:21–36:39)

Taxation of Crypto Assets

• The IRS treats Bitcoin and similar assets as property (not currency); gains are taxable just like copper or bandwidth.
  • Quote (Gil Luria, 38:03):
    “If I buy copper and sell it for more, I have to pay taxes on the gain. ... It is very unambiguous. ... The IRS does not have a sense of humor, and it is very binary.”

ICOs—Promise and Peril

• ICOs represent a revolutionary way to crowdsource capital and innovation, bringing fresh entrepreneurial vigor.
• Legal risks are serious: founders (and investors) must rigorously establish regulatory compliance (e.g., as Ethereum did).
  • Quote (Gil Luria, 39:06):
    “This new way of crowdfunding technology is absolutely fascinating. ... But when you’re dealing with people’s money, you need to work within a regulatory and legal framework. ... Otherwise a lot of people are putting themselves at risk at a very young point in the their lives, and that’s unnecessary.”

Notable Quotes & Memorable Moments

| Timestamp | Speaker | Quote | |-----------|---------|-------| | 01:36 | Gil Luria | "I did the right thing, which is to read the original Satoshi Nakamoto white paper ... I found the Bitcoin solution to be very elegant and have been involved in following it ever since." | | 07:04 | Gil Luria | "There have been several hype, boom and bust cycles already. It’s a feature of the way Bitcoin gets adopted..." | | 16:41 | Gil Luria | "Proof of work has been proven to me one of the most revolutionary changes in both computer sciences, mathematics and economics. The success of Bitcoin, to me is remarkable." | | 21:06 | Gil Luria | "Bitcoin to the Bitcoin network is as oil to the gasoline engine network of vehicles. ... It is such a unique animal, it's such an unprecedented type of asset that analogies help, but they only get you so far." | | 24:02 | Gil Luria | "All those entities are there to create trust for transactions in any other type of asset. And those entities I believe will all be either served by or replaced with a form of blockchain technology that may or may not be Bitcoin." | | 29:59 | Gil Luria | "Ethereum can do it, but it's like bathing in spring water. It wouldn't be a good use of the Ethereum compute power to move a penny to pay for a video online." | | 32:08 | Gil Luria | "I don’t think the government was ever out to get either bitcoin or blockchain... There was an honest, genuine effort." | | 38:03 | Gil Luria | "If I buy copper and sell it for more, I have to pay taxes on the gain. ... The IRS does not have a sense of humor." | | 39:06 | Gil Luria | "This new way of crowdfunding technology is absolutely fascinating. ... But when you’re dealing with people's money, you need to work within a regulatory and legal framework." |

Timestamps for Important Segments

• [01:36] – Luria’s introduction to Bitcoin
• [03:26] – History of digital payments before Bitcoin
• [07:04] – The 2013 bubble, crash, and significance for innovation
• [10:32] – Birth and development cycle of Ethereum
• [12:15] – Commodity economics vs. Bitcoin mining economics
• [16:41] – Proof of Work vs. Proof of Stake
• [21:06] – Commodity analogies and the ultimate transparency of crypto
• [24:02] – Distinguishing Bitcoin’s role in payments from blockchain in trust industries
• [27:25] – Bitcoin’s network effect and implications for competitors
• [32:08] – Regulatory landscape and startup barriers
• [38:03] – Tax treatment of crypto assets
• [39:06] – ICOs: promise, risk, and need for regulatory rigor

Closing Thoughts

Luria offers a pragmatic outsider’s perspective: He’s bullish on the revolutionary, proven aspects of Bitcoin and blockchain, especially in payments and as a new layer of trust for industries. He urges caution regarding speculative mania, unproven protocols, and regulatory shortcuts—emphasizing that while the crypto world is innovative and exciting, it must mature within existing legal and financial structures before achieving mainstream trust and adoption.

For further insights, tune into the full episode or see the related interview with Andrew Keys.