← The Peter McCormack Show
The Peter McCormack Show
Beginner’s Guide #4: What is Bitcoin with Stephan Livera - WBD185
00:57:17
Location: Skype Date: Tuesday, 14th January Project: The Stephan Livera Podcast Role: Host Welcome to the Beginner's Guide to Bitcoin. Bitcoin can be intimidating for beginners. The protocol is complicated, the community can be aggressive and...
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- [00:01]
Peter McCormack
Welcome to the what Bitcoin did podcast. Hello there. How are you all? Welcome to the what Bitcoin did podcast, which is brought to you by the mighty Kraken. The best place to buy, sell and trade bitcoin. I'm your host, Peter McCormack, and today I have part four of my Bitcoin beginner's Guide. And I've got an interview with Stefan Levera where he answers the question, what is bitcoin? But before that, I do have a message from my show sponsors. So firstly, today's show is brought to you by dropbit, the only mobile wallet I use for sending and receiving bitcoin. Have you downloaded it yet? Have you tried it out yet? I love the Drop bit wallet. I've been using it now for nearly a year. And they delivered on every promise they made. They said, pete, drop it. It's the Venmo for bitcoin. It's going to be the easiest way to send and receive bitcoin with your friends. And they did it. They crushed it. They made it so easy. When I first got access, I could do all the normal shit with addresses and QR codes, but they also had this ability to text bitcoin to your friends, which is pretty cool. But then they brought in the ability to tweet bitcoin to your friends. You can literally send bitcoin via Twitter. And I did it. I sent Donald Trump some bitcoin. He never claimed it, but I did it. I managed to send Donald Trump some bitcoin. They also added support for the Lightning network and they've added the ability to buy bitcoin from within the app. So many things in drop bit. Come on, time to download it. If you've not got it yet, go and check it out. It's available for the iPhone and Android. Just head over to Drop Bit app, which is D R O P B I T app. And also today's show is brought to you by Kelman Law. I know if I get myself into some bitcoin bullshit, then these are the guys I'm going to be calling. Kelman is run by two Bitcoin OGs based out of New York. And unlike other crypto lawyers you find online, these guys literally understand bitcoin and fintech. And of course, most importantly, you can pay them in bitcoin. One of the partners, Zachary Kelman, is known for drafting a bill submitted to US Congress in 2014 aimed at exempting on chain Bitcoin transactions from US regulations. The other founding partner, his brother Daniel Kelman. You might Recognize his name. He was on my series about Miles Gox, helping me understand some of the complexities around civil rehabilitation. Their team is staffed with lawyers with expertise in litigation, dispute resolution, anti money laundering, and US and international corporate structuring for fintech businesses or companies that have individuals operating in the Bitcoin space. So come on, if you need a lawyer, an expert lawyer. If you're working in bitcoin and you want an expert badass lawyer, you need to speak to Kalman Law. So you can email them on Infoelman Law, which is K e L M A N Law, or head to their website, which is Kalman Law. Okay, so onto the show today and we have part four of my Bitcoin Beginner's Guide. And to answer the question of what Bitcoin is, I have my buddy and fellow podcaster, Stefan Levera. Stefan has become a good friend of mine over this last year. We're always talking about what we're doing and helping each other in the background with ideas. And when I needed someone for this show, I reached out to Stefan. I was like, come on man, can you help me out? Stefan was like, yep, got you covered. And while putting together a list of shows for the Beginner's Guide, some were really easy to decide on. But the question of what is Bitcoin? Is quite tricky to answer because it can mean so many things to so many different people. You could be someone like me in the UK who bought some Bitcoin stuck on a ledger or Trezor and sat on it for a few years, using it purely as a speculative asset. Or you could be someone who's bought Bitcoin with their Venezuelan Bolivar and is using it as a tool to either protect their wealth against hyperinflation or get money out of the country without it being seized. Or you may just be a merchant looking for a different way to accept payments. Bitcoin offers so many different options to so many different people, so it's very difficult to define it as one thing. But the consistent thread in Bitcoin, no matter how you use it, it is entirely up to you. You don't need permission, you don't need to trust any third parties, and no one can censor your transactions or seize your Bitcoin. That is what makes Bitcoin so powerful. So Stefan and I dive into this. We get into why the permissionless, censorship resistant and trustless nature of Bitcoin is so important. Now listen, if you're a long time listener or you know Bitcoin, you might want to skip this One, it might be a little bit too basic for you and if you are a beginner, you might find this a little bit complex. Just bear with it. The next step is to go and play with some bitcoin. Anyway, we've covered the basics as simple as possible, but if you've got any feedback, if you do want to reach out to me, my email address is hellohatbitcoindid.com hi Stefan, Happy New Year. How are you?
- [04:27]
Stefan Levera
Thanks, Pete. I'm doing great. How are you?
- [04:30]
Peter McCormack
Really good, thanks. Really good. So thank you for agreeing to do this. As you know, I'm doing a beginner's guide to bitcoin. I've done three shows so far. I covered why people need bitcoin, bitcoin, I covered what money is. And I've now done a bit of the prehistory with Aaron. We looked at Bit Gold and E Cash and all the precursors to bitcoin. Now I want to get into explaining to people what bitcoin is, but hopefully we're not going to go too deep. I just want people to get a light understand of what bitcoin is so if they've got an interest, they can learn a bit more. So you cool with this?
- [05:01]
Stefan Levera
Of course, let's do it.
- [05:02]
Peter McCormack
All right, cool. So the white paper drops in 2008, 31st of October, my birthday. I was actually in Vegas. I think I've already mentioned this. And then, then on January 3rd, 2009, the protocol drops. Bitcoin drops to the world. But what is it?
- [05:17]
Stefan Levera
Right, and this is a very, you can go a long way with this. But the short answer of it is this was Satoshi's statement, his proposed solution to this idea. And it was a multi decade process and there was a build up to this as you covered in your earlier episode with Aaron. And so this was essentially at that point it was disclosed mainly to the cypherpunks. Right? So these are like cryptographers and privacy activists. And at that point then I think some of the initial interaction it wasn't like huge, right? Because it's one of those things where there were lots of attempts, right. And so I think it wasn't like, oh, this is it, we know this is the one. Right. It sort of took some time. And so then I guess if we sort of advance forward to early January when Satoshi, the pseudonymous creator of bitcoin, started the bitcoin network. Right. And so he start, he or she or whoever started the started running the software. Right. And then very soon after that, Hal Finney, another legendary cypherpunk, well known, and much of his work also went into bitcoin, such as proof of work. And so that's where the network really started. Obviously this was very much all before my time. Right. So I've just sort of learned this just from hearing from people in the bitcoin community and just reading. And so in those early days, it was very much like cypherpunks, privacy activists, very like computer programmer, nerdy types, and a few libertarian types as well later on.
- [06:53]
Peter McCormack
Yeah, and so bitcoin drops itself. You know, you can ask people and they'll say different things. Some people say bitcoin is money. Some people say bitcoin is gold. Some people say it's a, as a financial protocol, trying to get a new person in, not having a kind of clear and distinct answer can be quite complicated. I tend to think it can be all three of those things.
- [07:13]
Stefan Levera
Right. And yeah, so I think of it like, I think the framing I like best is digital hard money. And a hard money is a money that's hard to make. Right. So it's, it's not an easy thing to make. And I think the other part that's really crucial to understanding bitcoin is to think of it like a savings and a payment technology in both ways. And it's like a really advanced version of that. But in some ways it can also be seen like a savings and payments or payments technology of last resort. Right. So when you can't make a PayPal or a credit card payment or, you know, bitcoin is pretty much always there and it's always running. And so that's another way to think of using bitcoin. It's something that you can use, and it's been designed in such a way that it's just so hard to stop that you can use that as your last resort, if any, if everything else has failed.
- [08:00]
Peter McCormack
Okay, so let's go really super simple then. Let's keep it easy for people. Bitcoin is a form of money. It's a type of money. And bitcoin itself is also a protocol. So let's separate what the two are, because unfortunately the currency is called Bitcoin and also the protocol is called bitcoin. So let's start with the currency bitcoin itself. What is it made up of?
- [08:20]
Stefan Levera
Right. So yeah, so you're right. There's two parts to it. And so the currency of it, the token, if you will, you can think of it like how we've got dollars and cents, we've got bitcoin and satoshis, right? And every bitcoin is divisible down to 100 million satoshis. Or in the community we say sats. Right? And so this money, if you will, has been designed with a hard cap in mind. And so there will never be more than 21 million bitcoins.
- [08:48]
Peter McCormack
Okay. So if I have bitcoin, essentially I've got bitcoins and satoshis. Like dollars and cents is a type of money that's denominated in that way. And I, if I want to use it, I can use it on my phone or my computer. But when I'm using it, is this when I interact with the bitcoin protocol?
- [09:05]
Stefan Levera
Yes, that's right. And what you would use to do that is something like a bitcoin wallet, right? And so an example that you might do is you might have some bitcoin on your phone and you might be buying something from somebody in person, and they might hold up a QR code to scan, and then you might scan that with your phone, and then your phone will read that and say, oh, okay, would you like to Pay, you know, 0.01 Bitcoin to Peter or whoever? And then, you know, I would scan that and I would press send. And then what, what's happening in the background is my phone is acting with a Bitcoin wallet application on my phone is acting like a interface with the Bitcoin protocol. And in order to do that, it's creating a transaction and it's sending that transaction across the bitcoin network from me to you in that example.
- [09:58]
Peter McCormack
Right? So similar. If I have a PayPal account and you have a PayPal account and I want to send you $5,000, I just log into my PayPal, I look up Stefan, I send $5,000, and if off it goes to you with Bitcoin, I have a wallet. And if you have a wallet and I want to say, send you, I don't know, half a bitcoin, I then just put in your address and it does it the same, or is there something different going on?
- [10:22]
Stefan Levera
Right, great question. Right. And so there are a few differences there with PayPal, because PayPal is, think of it like they are maintaining a central database of who has what. And fundamentally, the unit that's being transacted on PayPal is different. So, for example, you might be sending me pounds or US dollar, whereas with Bitcoin, it can be a little bit confusing because bitcoin is the payment network or the protocol. And it is also the token, the unit. And the other part that's different with Bitcoin is it's intended to be like a peer to peer cash. Right? Now that means that you're not trusting a third party. So in that, in that PayPal example, you and I, we're both trusting that PayPal will not censor or stop that transaction. Whereas in the Bitcoin world, it's much more difficult for that to be stopped because it's just basically you're running this software and I'm running this software and we just, we use it to just send to each other.
- [11:20]
Peter McCormack
Oh, okay. So, right. So with PayPal, when I choose to send $5,000, I'm telling PayPal and they're updating the database they've got and they're telling you. And then, you know, but with Bitcoin, it's different because there, there isn't a PayPal at the center.
- [11:35]
Stefan Levera
That's right. And what is actually happening is Bitcoin users, when they run their Bitcoin software, they are keeping their own ledger of the transactions of Bitcoin. And, and that's why that's what this idea that we call like trust minimization, it means I'm not having to trust PayPal, I'm actually checking that using my own Bitcoin software that checks the rules of Bitcoin and checks that, yes, that is a valid transaction that Stefan was sending to Peter, for example.
- [12:03]
Peter McCormack
Okay, so I get it. So PayPal has this central database and we tell them and they update it, whereas this one, there is no PayPal. We all hold a copy of the database. So you have a copy, I have a copy, and when I make a payment to you, it updates my version, it updates your version and updates everybody else's. So everybody carries an identical copy of this ledger?
- [12:25]
Stefan Levera
That's right. So everyone carries a copy of the ledger. And I suppose one part that might be a little bit confusing is that you don't necessarily know who is behind what address in Bitcoin. But fundamentally, that's. That's right. It just is a little bit of a mind shift. But once you get used to it, it's, it's actually really simple. Once you actually get, once you get started. Right. And so that's why typically when a more experienced bitcoiner is trying to teach a new bitcoiner, they might just start them with a small transaction just to see what it looks like. And because once you get started with it, that's really when it feels a lot easier.
- [13:00]
Peter McCormack
Right. Okay. So the protocol is essentially the software that runs bitcoin. We can all download it and use it if we want to, or we all can interact with it, but everybody who downloads it carries a copy of the full ledger.
- [13:14]
Stefan Levera
That's right. That's right.
- [13:16]
Peter McCormack
Great. Okay. I'm getting my head around this. Getting my head around it, Stefan. Okay, so let's talk a little bit about the protocol. I've heard about this thing called the blockchain. What's the blockchain?
- [13:25]
Stefan Levera
Okay, so think of it this way. Transactions in bitcoin are put into a block, and then the blockchain is literally a chain of blocks. And so the cool thing with bitcoin is that it uses some of this fancy cryptographic, you know, maths or magic, if you might want to think of it like. And what it does is it chains these blocks in such a way that it's hard for somebody to. For us to bluff each other about what was the true state of that ledger or the history of bitcoin. And so the way bitcoin works is that each block builds on top of the other and that there's a increasing block height. So, you know, the first block, you know, et cetera. Each block builds on top of the other. And each block. Part of the mathematics of it is that each block contains what's known as the double SHA 256/ of the previous block. And so what it does is it creates this overarching system that's in some ways hard to compute, but easy to verify. And so without going too much into the detail around, like mining and so on, maybe we can do that after. But the basic idea is that the miner might expend a lot of energy trying to mine the correct block in what we might think of like a lottery system. But then each bitcoin user, when they're running their bitcoin node and their software, it's very quick for them to check that it's correct. And so the analogy often used here is like Sudoku, right? So when you have a Sudoku puzzle, it's very difficult to first solve it, but if somebody hands you the solution, it's very quick for you to check. Oh, yep, that's the correct solution to this Sudoku puzzle.
- [15:06]
Peter McCormack
Right? Okay. So basically, the blockchain is the records of all the transactions. So when we talked about spending sending money to each other, they exist in these blocks. And it's like every 10 minutes, a block is created, and it's hard links to the previous block so it can't be undone. So everybody can trust it.
- [15:24]
Stefan Levera
Right? And that's what we call that property is known as immutability. And so the concept there is, as has also been explained, is like amber. It's like the more amber that gets formed around it makes it more and more difficult for somebody to go back and try to rewrite history. And so I guess, let me explain, like why, why are we doing this? Why is there this really complicated system? Why can't we just use a normal database? Well, the problem in Bitcoin that we're trying to solve is how do you make this system trust, minimize. How do you make it so that it can't so easily get shut down? Right? So let's say big government or a big business wants to go and tamper with the ledger. And then if they took that ledger, let's say we trusted one person, but then the government or the business, someone or, you know, some bad person goes and takes that ledger away, then how would the rest of us know which one was the right one? Well, that is why.
- [16:13]
Peter McCormack
Right?
- [16:14]
Stefan Levera
So that's this concept of us coming to what might be called consensus or like in a distributed way, not in a, not in any kind of way that, you know, the head can get lopped off. Right. So your listeners might be thinking of, say, BitTorrent. Right. So the idea is, well, you know, BitTorrent, when people use BitTorrent, they. They're all sharing that file. So you can think of bitcoin in some, there's some parallels there with BitTorrent because we're all sharing that ledger around with each other constantly. And then when we see a new update to that ledger, you and I, our bitcoin nodes will share that information with each other. And then we sort of say, oh, have you got the latest transaction? Oh, have you got the latest block? Oh, here it is. Have you got. Here you go. And then we have to sort of all agree on what is the, what's known as the state of the network or what is known as the ledger that we are all transacting on.
- [17:01]
Peter McCormack
Right? So it's almost like everybody who's part of the network works together to keep it honest, to ensure that everyone's got the latest sets of transactions. Okay, so that makes sense. What stops somebody cheating it?
- [17:13]
Stefan Levera
That's a good question. So part of that is your full node has certain, your Bitcoin software has certain rules that it is checking and it will not accept a transaction or a block in if they are not valid by certain rules. And this comes back to some of that cryptographic mathematic, if you will, as we were talking about earlier, it's checking that certain rules are met. And one of those is that the, this comes down to hashing. So one way to think of hashing is like a fingerprint, right? So you'll always produce the same fingerprint, but it's extremely hard to find another person with that, you know, with that exact same fingerprint. And so you can think of a digital, kind of like a digital analog of that, right? So if you have a certain file and then you run a hash function on that, it will always produce the same result. But if you change the first part, the pre image, like the part before you've run the hash on it, it will change the end result dramatically. And so that is one concept that gets used within Bitcoin to make sure that the same input will always produce the same hash. And then that hash is always of a fixed size. And then basically brute force trial error is the only known way to get that. And that's part of how we know that it was difficult for the miner to correctly find the proof of work for that. And then there's other certain rules, like most accumulated work. So there's certain rules that basically the Bitcoin network uses to come back to consensus if there is ever like a split.
- [18:47]
Peter McCormack
Right? So I get it. So everybody who wants to be part of the network can download the software. Everybody has the software that's running the same set of rules. So you can't cheat the system because we've all got the rules. And then if I want to make a payment in the system and I broadcast that payment, everyone gets broadcasted that payment. So everyone is aware of it. And then all Those payments every 10 minutes are blocked up into a block, securely put away. And then we start again.
- [19:15]
Stefan Levera
That's right. And that process happens on average every 10 minutes. And then that is just an ongoing process, a never ending process.
- [19:24]
Peter McCormack
So the blockchain is also, it's like a chronological history of all transactions.
- [19:29]
Stefan Levera
That's correct. So if you download Bitcoin and run Bitcoin today, it will have all the transactions all the way back to what we call the Genesis block, the first ever block in Bitcoin, like early January 2009.
- [19:42]
Peter McCormack
So somebody listening right now, Stefan might be going, what the hell? I just came to learn about digital money. You've talked to me about proof of work, you've talked to me about nodes, you've talked about all these crazy things. This is really complicated. I don't know what's going on? I always think the start, a good starting point is go and create an account, go to a Kraken, go to a Coinbase and buy your first bit of bitcoin and then download a wallet. And once you've got a wallet, once you move from one to the other, that's almost like your starting journey to get a feel for what this is. How do you feel about that?
- [20:12]
Stefan Levera
Right? So I think that's, it's all part of the journey. And you might go to a bitcoin meetup or you might have a friend who is into Bitcoin and you might, they might set you up with a small mobile wallet. And so that's one way to interact with Bitcoin. And you might buy a small amount of Bitcoin or maybe they'll just give you, you know, $5 worth or just a small amount of Bitcoin. And that is a typical way that people start, get started just by understanding, okay, this is how I receive a bitcoin transaction and this is how I send a bitcoin transaction. And at the start, you don't need to worry too much about the details of like, oh, what is a node and how does mining work and blah, blah, blah. Right? You can just start with a basic app and then over time you improve your knowledge on it and just build that knowledge until you get to the point where you know how to run the bitcoin software for yourself.
- [20:59]
Peter McCormack
So don't get scared off, go and buy a little bit, have a little play, have a play with some wallets and then just start going down the rabbit hole. Okay, that's great advice. So we talked a little bit about this protocol. Who manages the protocol, who's in charge of it, who's, you know, what stops somebody going in and, you know, writing some, a little hack into the code so they can steal the bitcoin.
- [21:19]
Stefan Levera
Yeah, great question. And so bitcoin is an open source protocol. That means all the code that is inside Bitcoin core and Bitcoin is open source, meaning anyone can see it and that means anybody can also contribute to it, you may propose your own improvements, or you may propose a change to the code of Bitcoin. And because all the discussion happens out in the public, so you can literally go to GitHub.com and see the code for Bitcoin. You can participate in the discussion on irc, you can participate in the discussion on email mailing lists for Bitcoin. And there are also other forums as well where people will discuss about Bitcoin and conferences and so on. People write papers and so on. Now to your question about could somebody try to steal the bitcoins? Well, this is where the importance of review comes in. So Bitcoin doesn't just accept any code change at all, right? It requires going through certain processes of review. And so before a software developer can successfully put their change into Bitcoin, it has to go through a review from other members of the Bitcoin community. And then a bitcoin maintainer has to actually merge that change in, basically meaning accepting that change to the code of Bitcoin. Now, it's, it might sound a little strange to listeners who are not used to the idea of open source, but basically it just means all the discussion happens out in open. Anyone can make a contribution, but it's not that all contributions are accepted, it's that there is review and there's testing and so on before any serious changes merged or accepted into the Bitcoin protocol.
- [23:06]
Peter McCormack
Okay, so a little bit like how when we were doing payments, we all had a copy of the software, we were all kind of trusting each other and working together to ensure that all payments are secure. A similar thing's happened on the back end is like there's a group of people working together to keep the code honest.
- [23:21]
Stefan Levera
That's right. That's right. And there are differing levels of competence, right? Like not everyone is a developer, right? I'm not a developer, you're not a developer. But we might have friends who are developers, or we might pay someone who is a developer to review code for us, or we might participate in the discussion and see from what other people are saying. And so in that way, users of Bitcoin also have a say in what Bitcoin becomes because it's not just a developer kind of. They're not the benevolent dictators, right? Because ultimately developers can create some code, but users don't necessarily have to run that code. And so sometimes there's a little bit of an aspect of building agreement or building support for a change. And that's something that we have seen in Bitcoin for the larger big changes. Now, for small, low level changes that aren't that important, those can sort of just happen in the background or not so much in the, well, kind of in the background for the average user. But if it's a big important change, what we call a change to the consensus of Bitcoin, then it requires a lot of review from not just the developers, but all the kind of parties in the bitcoin ecosystem. If you will, right? Like miners and exchanges and payment processes and merchants and users and developers.
- [24:37]
Peter McCormack
Damn, it sounds complicated. So, okay, the next thing I'm thinking, right, Stefan, I like this bitcoin. I'm going to get myself some. I'm going to have a play with it. So I go and sign up to an exchange. I've been told the exchange is where to buy them. And then somebody said to me, oh, you need to store your Bitcoin in a wallet. So what's a wallet?
- [24:56]
Stefan Levera
Right? So a wallet, think of that as an application that manages your bitcoin for you. Now, in Bitcoin, it, one way to think of it is like a keychain, right? So you have multiple addresses and you can think of that like having sort of like having different accounts, right? So every time you want to receive bitcoin, your wallet will generate a new address now in the background. Now, your wallet manages this for you, but it has a key associated for that address. And you can think of it like, if somebody gets that key, they can spend your bitcoins. So that's why it's very important that you keep your keys secure. And so think of it like there's lots of addresses and your wallet manages like a keychain of all the keys that are associated for those addresses. And then the way the bitcoin network works or the way the rules are set is it's kind of set like the person who proves that they have access to the key. And typically that's done with what we call a digital signature. And that digital signature is sort of like a way that you can prove you hold the key for this address without necessarily telling the world the key, because obviously now they could spend from that address too. So the way it works is your wallet manages all that in the background for you, such that when you want to spend, it picks, okay, I want to spend this coin to Peter or whoever, and here's the key, and it will sign that transaction and it will broadcast it to the bitcoin network. And that's that process, then the gossip process, where all the bitcoin nodes talk to each other and say, oh, have you got all the transactions? Here's the transactions.
- [26:31]
Peter McCormack
Okay, so a wallet is where I keep my bitcoin. I can have separate addresses. So, like, separate accounts. So a bit like, I have my savings account and I have my current account, I can have different bitcoin addresses. And it sounds to me like the key is like a master password for each address, right?
- [26:49]
Stefan Levera
So one way to. So the typical okay. Don't need to go into the technical aspects of it, but think of it like you have a master key.
- [26:58]
Peter McCormack
Yeah.
- [26:58]
Stefan Levera
And this master key gets you access to all of your Bitcoin that's held on that particular wallet.
- [27:04]
Peter McCormack
Okay.
- [27:05]
Stefan Levera
And so that master key gets you access to all the different addresses. And that is the thing that you need to keep backed up. And that's the part that you need to keep a secret, obviously. And that's, you know, it's an imperfect analogy, but people might think of it like a banking password kind of thing. Once somebody gets that, they can get your money. So be very careful with that. And that's where you've got to take security precautions.
- [27:27]
Peter McCormack
And when I first start. Get started Bitcoin, when I start playing around with my first wallets, will I actually have to use that key or will it all be done for me?
- [27:35]
Stefan Levera
So the wallet manages the key for you in the background, but you may need to log into that wallet. So there might be a pin code to log into that wallet, but that's not necessarily the same thing as the key. And that's, again, that's where some people who are new to Bitcoin, they fall down or they fall into a trap where they haven't kept a backup of that key. And so typically that is 12 or 24 words, and we call it like a seed, a 12 or 20 or 4 word seed. And they need to keep that seed backed up and potentially a passphrase, which you can think of like the 13th or the 25th word on your seed. And so typically when you set up a wallet, it won't always be at the very start. Depends on how the wallet was designed. They will give you that 12 or 24 word seed, and you would normally write that down and you would keep that in a safe place, or you might even keep that on a metal backup. But that's basically what you're thinking, that like your password, or that's really. That's your seed.
- [28:30]
Peter McCormack
Okay. So I create my wallet. It has this master key that allows me to log in and send and receive Bitcoin from the various addresses. But also you're saying I need to back up that and hide it away in case I lose it. But what if I lose it? Like, can I just use my. Can I use my restore password? Will there be a restore password button?
- [28:50]
Stefan Levera
So that is one of the big differences with Bitcoin is that there are no bailouts in Bitcoin. And so that is why it might be a little bit scary at the start. But we have to learn to basically advance our knowledge and our accountability, personal accountability. And so this is one area where if you do not back that up and if you don't back up the. If you've got a seed and if you've got a passphrase, you need to keep those backed up. You absolutely must. Because if you don't, that's a common trap. And what happens with Bitcoin is if you lose the seed and the and or passphrase, you basically lose access to that bitcoin. So it's basically like those bitcoin will get trapped in the ledger forever because no computer is strong enough to crack that password. So that's kind of a simple way to understand that.
- [29:43]
Peter McCormack
Next up, I talked to Stefan more about what Bitcoin is and how it works. But before that, I've got a message from my amazing sponsors. And first up we have the mighty Kraken. The best place to buy, sell and trade bitcoin. And I say this every week, but why is Kraken the best? Well, firstly, they've got the most secure exchange out there. Safeguarding your funds and protecting your privacy is their number one objective. They also offer additional layers of near real time hyper personalized support through the Kraken account management system. And they have got a suite of trade in products that no one can compete with. Firstly, they've got kraken.com, where it's the best place to trade. You can supercharge your trades with up to 5x leverage. You can access up to the second pricing data with cryptocurrency indices powered by CF benchmarks. You've got next level trading with Bitcoin futures. The OTC desk offers deep liquidity and private and more personalized service. And they've just launched Kraken Pro, a beautiful mobile first app so you can trade Kraken on the go wherever you are. There is no better place to trade bitcoin. You, you want to find out more, head over to kraken.com or download the app which is available for the iPhone and Android. Just search for Kraken Pro, which is K R A K E N P R O. And also today's show is brought to you by the amazing blockfi, the future of bitcoin and financial services. My oldest sponsors, some of my best friends in the industry, love these guys. And what an announcement. To kick off the year, BlockFi is launching a BTC rewards credit card where you can earn Bitcoin cash back on your purchases. I cannot Wait to get this. Come on, Zach, hook me up, get me this as soon as possible. They've also got a mobile app coming and they've launched support for USDC and Litecoin. This is all on top of their market leading crypto back loans. And the interest accounts for bitcoin, ether and gUSD, which I am a customer of. 2020 is going to be massive for BlockFi. I know they're going to crush it this year. I know we're going to be working together all year. Make sure you go check them out. Head over to blockfi.com which is B, L, O, C, K, F I dot com. So one of the early things I'm gonna have to do is go down the security rabbit hole, learn a bit more about security, how to protect my bitcoin. Yeah, there's a lot to learn here, but still. Okay, I'm in. I've got my wallet, I've got my bitcoin, Stefan. I'm gonna play with it now. So I want to send you some bitcoin. How do I do that? What do I do?
- [32:02]
Stefan Levera
Okay, so there's a few different ways. I might show you a QR code and you might scan that with your phone and then your phone will read that and say, okay, it's 0.1 Bitcoin or whatever, and then press send. Another way is I could copy paste an address. Now nowadays that will look something like a string of letters and numbers and it might start with BC 1, 2, 3, X, whatever. Right. It'll be like 20, 20 or 30 characters, whatever. And I could paste that to you online and you could also pay a set amount of bitcoin. But I guess one part here that you've got to be wary of is bitcoin is its own unit, right? So it might be a certain number of satoshis, but because the exchange rate is fluctuating over time, that can be a little confusing for people who are new because they haven't quite grasped that bitcoin is its own unit of account. And so what might first be $10 worth of Bitcoin? Let's say the price fluctuates and now that's actually worth $11. And so that's a little part that you'll have to just get your head around. But once you get, once you get do a transaction or two, you'll start to get used to that idea.
- [33:15]
Peter McCormack
Okay, so I kind of get it. You're going to send me either a QR code or a string of characters and I'll put That in my wallet to send to you, and then I'll click send. And do you get the money straight away? Does the bitcoin come to you straight away?
- [33:27]
Stefan Levera
Okay, so what happens there is your bitcoin transaction gets broadcast to the network straight away, so everyone on the network can see it. But remember that Amber concept that only happens once every 10 minutes. And that is what we call a confirmation or AKA when a miner finds a block, or in this lottery system, in this kind of decentralized lottery system, and they include your transaction into that block. Now, there's a few other complexities around it, things like the fee rate and so on, but for now I think it's simple to just say your wallet deals with that. And so your wallet includes the fees and so on, and then on average, every 10 minutes, a new block is found. So if you're, most of the time, if you're lucky, your transaction will get included in the very next block. But if not, don't fret because it just might mean it's still waiting to get confirmed. And that might take another two or three blocks or who knows? But that's kind of the short way to think of it. And then on my side, on the receiver side, I have to be careful that I don't just take a bitcoin transaction incoming without also waiting for a confirmation. And so I would normally have to wait until your transaction has actually been included inside a block. That is, it's been confirmed before. I may now spend it on onwards. Until then I need to wait because that's part of, part of Bitcoin's security.
- [34:53]
Peter McCormack
So you're essentially waiting for the Amber to lock around the transaction. Like you said before, look around it, make sure that's a confirmed transaction, it's real and exists.
- [35:03]
Stefan Levera
That's right, because up until that Amber has locked around it, in this analogy, I don't have it for sure because there are some attacks that can be performed. Now, again, most of the time your wallet will deal with this for you. Generally speaking, you just wait for a confirmation. Now, depending on the amount as well, Right? So if you're waiting, if you're just receiving a small amount of money, then okay, one confirmation is probably fine. And even in very low amounts, you might even take a zero confirmation. But generally speaking, that's not the practice. And then for high amounts, like if you're spending like $100,000 or something like that, then you normally want to wait more confirmations, right? You might want to wait four or five, six confirmations for that. Kind of money.
- [35:46]
Peter McCormack
Okay, still. Still very complicated. Lots to get through here. But I'm interested. Okay. It seems kind of cool, but why do I really want to do this, Stefan? Why, why should I care about Bitcoin? Why do people actually care about it? Because, you know, when I use PayPal or use my bank account, you know, I don't have to think about this. I log in, I put your email address in, I send you some money, or with my bank account, I log into my bank account and I can send you some money. And you know, if I make a mistake or somebody steals that money, I can get it back. Bitcoin is like, there's all this complicated stuff I've got to understand and I've got to learn. If I make a mistake, I lose it all. So why should I do this and why are people doing this?
- [36:24]
Stefan Levera
So, yeah, great question. And so it comes back to two points, I would say. So comes back to that idea of it being a better savings technology and also a better payments technology. So there's two parts of it. So let's talk about the payments part first. There are some people who don't have access to PayPal or credit cards or they've been deplatformed or debanked. Those people basically have to use something like Bitcoin because it's much harder for them to use cash over the Internet, obviously. So that's one way that they are able to still accept payment for their services. And this can happen in different scenarios where somebody's been, say, kicked off social media or maybe the payment processes don't like them or for whatever reason they've been debanked. That's one part of it. And then the other part of it can be thought of a little more difficult to think of in the short term, but it's more like a longer term aspect of it where people who buy Bitcoin and over the longer term, when they have really taken a long time horizon on their purchase of Bitcoin, they've been up in purchasing power terms. And part of the reason for that is that now again, this is being honest, being open. This is speculation, right? So this is basically speculating on future adoption of Bitcoin and also speculating on this future value of Bitcoin relative to other forms of savings that you could have held. And so in some ways it's kind of like a hidden tax of inflation where if we keep, you know, if you keep pounds in your bank account or I keep Australian dollars in my bank account, over time, the amount that I can purchase is going down. And so why is that? Right? And so because we have a fiat money banking and money system. And fundamentally what is done by that is we have. So without going too much into the detail, there are. Governments have created central banks and they've created a banking infrastructure that creates inflation. So, for example, when a commercial bank creates a loan in a fractional reserve banking system, they are actually loaning new money into existence ex nihilo, just out of nothing. And so what that does is it causes what we call the Cantillon effect. And what that means is the person who's getting the new money first is the winner. And the person who's getting that new money, by the time it's flowed out to everyone else, they are in this sense the losers because they are spending at today's prices with kind of yesterday's purchasing power. Whereas if you are the bank or you're the person getting the loan from the bank, you're getting the new money first. So you're getting to spend it first and you're getting a benefit out of that. And that causes this systemic impact to the system, which continually devalues all of our money. And then the other factor to lay onto that is typically there are capital gains tax laws in most countries. And so when you buy an asset or you buy a house and the value of that goes up, part of that value going up isn't really like real value going up. It's actually part of that is just inflation. It's just going up because of inflation. But then that's getting taxed away because that's getting added to your tax return at the end of the year. So in that way, people can think of bitcoin as a kind of savings outside, sort of independent of the mainstream banking system and independent of the government. And so it can be people can speculate on that with a percentage of their investment or if they want to regularly accumulate. Right, Known as dollar cost averaging or stacking stats, as we say. These are ways that people try to accumulate a position in Bitcoin. And they do that typically because they have a future bullish belief on bitcoin. And this has sort of proven out over the history of bitcoin, is that there are people who bought at a high and then lost money, but typically there weren't that many people who bought it that high. And typically the people who held for a long enough time eventually got out into the positive. And so again. But again, that is a speculation, right? So we should be upfront about that. So it's two prongs, right? So it's a savings technology and a payments technology that are difficult for somebody to stop you. And that's kind of one of the powers or special things about Bitcoin.
- [40:50]
Peter McCormack
Right? Okay, so this is when we talk about magic Internet money, then the money that just goes up in value. So what the speculation is, is we're speculating that bitcoin will continue to grow. More people will want to use it, more companies will want to accept it, and as more people use it, there is a higher demand for the bitcoins that are available, and therefore the value of bitcoin goes up. But where bitcoin, you're saying, is different from government money is that you can't print anymore, so there still will only ever be. There's 21 million. Therefore, that's why it's. So it is a speculation on growth.
- [41:26]
Stefan Levera
That's right. And so right now, today, as we record this, the number of bitcoins outstanding is something like 18.1 million or something in that region. And most of the bitcoins that are to be issued have already been issued. Right. And I think it's in the maybe early or mid-2030s, when 99% of Bitcoin supply will have already been issued or already been created into existence. And so that last 1% is getting mined or created from that time in the mid-2030s all the way to 2140. Right. So part of that is just to understand exactly how scarce bitcoin is. Right, because there will never be more than 21 million, and there's more than that number of millionaires in the world. So if every millionaire in the world wanted a one full bitcoin, they couldn't get it. And so that is part of why many of us are very bullish on bitcoin, because we see it as something that's strictly scarce and not just that, that the amount of incoming supply every year is very scarce.
- [42:32]
Peter McCormack
Okay, so that's the speculation covered, but the speculation is linked to use. And what we are saying here is people might want to use it. Some people who can't get access to banking services, or some people who want to send international money internationally. So I've got actually a good example right now. I have some money in my PayPal account and it's locked and it's been locked for a week as they want to verify something. So I can't actually use that PayPal money. So if I wanted to send you some money now, Stefan, I could use bitcoin what are the advantages of using Bitcoin right now to send you money over, say, My bank and PayPal?
- [43:05]
Stefan Levera
Well, Bitcoin is designed to be a more permissionless system. And that's the key part that I think you're hitting on there, which is that banks and PayPal have to comply with a whole swathe of government rules around financial controls, right? Things like AML and sanctions and so on, whereas the Bitcoin network is not subject to those. Like, if you're directly using Bitcoin, you just basically scan the address, you pay it and off you go. So in that way, it's designed to be very open, permissionless, and what we also call censorship resistant. It's there to stop censorship of transactions.
- [43:43]
Peter McCormack
Right, okay. Well, it sounds pretty cool. Are there any disadvantages? Are there any, you know, what, what are the disadvantages of using Bitcoin?
- [43:51]
Stefan Levera
Well, yeah. So look, part of it is, again, the security of it. It can be difficult to secure. It can be. It can be a long journey to learn how to use it correctly and safely. There have been hacks of people who have not held their Bitcoin securely. There have been people who have not held their backups correctly. There are risks around things like if the miners were to attack the network or if somebody were to try to attack the network. Now, for the most part, the incentives of the system are designed in a way to stop that kind of attack. And it sort of makes it more that people who want it's better or more profitable for you to just legitimately participate in the network than to attack the network. But it, you know, truthfully said it is a risk. And so those are some of the key risks. People. Some people say things like, oh, the government would ban bitcoin. I think that's unlikely. But it is, again, it is a risk. I just think it's extremely unlikely.
- [44:55]
Peter McCormack
Right, okay, cool. So the next thing I'm going to recommend people do, Stefan, is, you know, we're obviously asking these questions like, neither of us know. Well, like, I don't know anything. And I, you know, I've got a bit of experience. But one of the things that was very difficult in the early days is whilst people say bitcoin doesn't have a community, there is a group of people who are interested in bitcoin and they seem to have a kind of set of shared values. Now, I know it's not a prerequisite to buy Bitcoin and be involved in bitcoin to. To have these shared values, but they still exist kind of what are the kind of things that bitcoiners care about? You know, what, what, why are these people kind of on the same page? What are these, the important things that bitcoin is doing?
- [45:34]
Stefan Levera
Right? So I think there's fundamentally a commitment to things like 21 million cap, right? So that's like a very important thing within bitcoin that people don't want any inflation beyond the 21 million. So that's one thing that everyone's really committed to or most people committed to. They're really committed to this idea of censorship, resistance, right? This idea that payments should not be censored. And that's something that people try to preserve. They are also in some sense conservative. They are very careful about any changes to the bitcoin protocol because they rightly see this like, this is a very long term project. This is like civilizational infrastructure that we're building here. We have to be really careful, right? It's like, you know, it's, it's just like a really mission critical sort of software. Another value of bitcoiners is and it's valued to different degrees by people, but privacy is another aspect as well. So people, there are people within the bitcoin world who try to make sure their payments are private. And so that's a more advanced discussion, but that's rightfully something that has to be mentioned as a concern that people might share that they don't necessarily want to link their bitcoin transactions with their real world identity and they will take steps to try to preserve that distance, if you will, and create an ability for them to use Bitcoin to buy things that they don't necessarily want people to know that they bought. I mean it could be something like you want to protect your privacy and you might buy a VPN service and you might pay for that with vp, with bitcoin. So that's one example there.
- [47:14]
Peter McCormack
So it sounds like bitcoin is like an underground group of anarchists and rebels trying to keep, keep away from the government, away from understanding exactly what they're doing.
- [47:26]
Stefan Levera
So look, I won't deny there are some people like that Bitcoin is a big, is a broad church, if you will. And you don't necessarily have to be anarchist to use Bitcoin because we think of it more like bitcoin is just a stronger money, it's a superior money and people will just adopt it over time because it just, it's a harder money, it's a, it's a more scarce money. Now another few examples I Could present are people who are coming from more like a journalist perspective and they are trying to expose, let's say, wrongdoing or corruption in the country that they live in and that they, they have a need for, you know, a payment system of last resort. And so they would also use Bitcoin. And then there's a whole range of people who come from the more sort of white market world of, you know, it's like fully, you know, compliant everything bitcoin. So there's a really a big range of people who are in Bitco. It's not only, you know, privacy activists, let's say.
- [48:26]
Peter McCormack
Okay, cool, so I'm going to buy some. I'm going to go onto an exchange, I'm going to get myself some bitcoin, going to go check out Kraken. And while I'm there, I did notice there's a few coins, there's a few things I can buy. I noticed there's a few things called bitcoin. There's a bitcoin cash. I noticed there's a thing called Ethereum. Like, a lot of them seem cheaper. You know, bitcoin's gone up quite high now. So I'm thinking perhaps I might try and invest in some of these other ones. What do you think about that, Stefan?
- [48:51]
Stefan Levera
Right. And so here I would think of it, there's a lot of what we might term cargo cult. Right? So there are people who try to mimic certain aspects of bitcoin and then pass off their coin as though it was bitcoin or superior to Bitcoin or cheaper than bitcoin. Right. And so to explain the analogy, I think there were some islands in the Pacific and like during wartime, American planes would land there and drop supplies and so on. And then later, after the war had ended, they would try to almost bring. Invoke the planes to come back by setting up a fake Runway or a fake hut or like a fake, you know, air traffic guy. Because in their minds, they thought just by recreating this thing that, you know, the planes would come and drop supplies and so on. But they didn't understand the war was over. Right. And so in the same way some of these alternative coins, they have tried to copy certain components of bitcoin and pretend like they're all part of the same industry and they're all, you know, that they too are like bitcoin, but they're just fundamentally not. Now, a few key reasons, they typically tend to have a more centralized development process or they might have what we might term a benevolent Dictator quotation marks that person who can drive development and they can just sort of put their foot down and say, no, this is what we're developing, we're going this direction. They might have certain angles of centralization where let's say the US Government could come to the Ethereum foundation and just try to lay down the law, right? And try to say, no, we don't want you to transact or permit the transaction between this person and that person. And so another thing that some of these alternative coins have done is make a certain trade off on security without necessarily telling the people who are being marketed to, right? So they might say, oh look, we've got faster block times, we've got faster transactions without also saying that actually they traded off security in order to get that. And so my suggestion would be just stick to Bitcoin and learn and read about Bitcoin first. And the reason for that is, you know, those mentioned, those reasons I mentioned earlier, but also that there's a lot of churn in this space, right? So if you look at the top 10 leaderboard, you know, five or 10, five years ago, it was very different. Only bitcoin has remained at the top, whereas a lot of those other coins have gone in and out. And part of that comes back to this concept of network effects. So with Bitcoin, Trace Mayer talks about this and other people mentioned it as well. Bitcoin just has the strongest network effects. So other people can try to copy certain aspects of it, but fundamentally it just kind of coalesces back towards the best one. And that is measured not just in terms of technology, but also as a money. So that's one way to think about it. And some of those aspects on which that happens is things like liquidity, right? So Bitcoin actually has the best liquidity out of all of the cryptocurrencies, quote, unquote. And there it also has a strong number of developers, a good number of users, transactions miners who are securing it. There's more exchanges and there are more merchants who accept payment in Bitcoin as well. So that's part of it as well, because when you buy a certain, when you're buying something that you want it to be a money you want to care about, who else is the network that I could transact with for that money. And so bitcoin has the biggest one for that of all the cryptocurrencies, so to speak.
- [52:15]
Peter McCormack
Right, okay. So you're saying keep away from them because they don't really have the effect, they don't have the network effects of bitcoin. They're not decentralized like bitcoin. So ultimately, if you're speculating, it's a much higher risk. Speculation.
- [52:31]
Stefan Levera
Exactly. Exactly Right. And so I would. Yeah, I would agree with that.
- [52:35]
Peter McCormack
What about my mate Dave, who said he invested in all these ICOs and he bought into all these ICOs and made a bunch of money. Should I also be investing in ICOs or should I avoid them?
- [52:45]
Stefan Levera
So obviously I would avoid. There have been many, many scams in the space, and in reality, many of these ICOs have tried to market themselves as being. And maybe not even intentionally, but they just try to give off this impression that, hey, you know, you might have missed the boat on bitcoin. It's too late for that, but you can get it on the ground floor with this one. So do that. And what happens is a lot of people don't realize that actually in these ICOs, there's like, groups dumping onto other groups, right? And so there's like, insider groups to get the real better price, and then they're dumping their bags, so to speak, on the next layer down, and then they're dumping on the next layer down. And so that is why I would caution very carefully against ICO investment and really learn and understand a bit more about bitcoin before you try to branch out.
- [53:34]
Peter McCormack
Wow, there's been a lot here, Stefan, and I was going to ask you about Austrian economics and libertarianism, but I think that might be a step too far for today. So we might do that one separate. Perhaps I'll point them in the direction of the show we made about that. But this has been amazing. There's been so much here. I want to take a step further. You know, what are the things I should do now? Tell me what to do now after this show.
- [53:54]
Stefan Levera
Right, So I would say, like you said, you want to just get a small amount of bitcoin just to get some skin in the game, so to speak. And then there's a bunch of resources in the bitcoin community. Obviously, there's your podcast. There's my podcast. A few good books that are good to read as well. So a few books that I typically recommend. One is the little bitcoin book. Another one is Inventing Bitcoin by Jan Pritzker, the Bitcoin Standard by Safe Dinamous. Those are some resources that I would point them to. And then I would point the listeners towards getting a hardware wallet. I think that's a good step to take as well. But again, it's a journey. And you don't have to, like, we're not expecting you to be a hero straight away. Right. You just have to build your way up to that.
- [54:35]
Peter McCormack
And if I'm feeling nervous, if I'm feeling like, God, there's so much I've got to take in here. Any. Any advice for me, I would suggest.
- [54:44]
Stefan Levera
Going to your local bitcoin meetup. I think that's probably the best way that you can meet someone in person. And typically, if there's a bitcoiner there at that meet up, they can point you in the right direction and give you some resources, give you some in person coaching. Otherwise, you can find, you know, some coaching online or you can find, you know, podcasts and YouTube and articles and books. But yeah, I would say probably your best bet is actually going to a local bitcoin meetup, if you've got one in your city.
- [55:13]
Peter McCormack
Fantastic. Well, Stefan, thank you for coming on. I know this is a very different show from a normal one. Appreciate your help in keeping this simple for everyone. I will share out your show in the show notes and advise people to go and follow you on Twitter as well. And thank you for this.
- [55:28]
Stefan Levera
Thanks very much for having me, Peter. It was a pleasure.
- [55:33]
Peter McCormack
All right, so what did you make of that one? I think this is a really important show in the Beginner's Guide because bitcoin can mean so many things to so many different people, so many different reasons to use it or different ways to use it, and it's because it's censorship resistant, because it's decentralized and because it's trustless, it is enabling these new use cases for money. Now, if you did find this tricky to follow, don't worry. We all struggle in the beginning. It really is now time to just dive in, get yourself dirty with some bitcoin, go and buy some, move it around, have a play with some wallets. By playing with it, a lot more of it will become clear. And also do check out the show notes. There's a bunch of stuff in there to help you go down the rabbit hole. Also, go to my website, check everything out on there. Go to Stefan's podcast as well. Check all these things out. There's so many resources to help you. Now, Stefan was great at going through this and breaking down why bitcoin is so important. So thanks as always to him for coming on the show. On Friday, I've got part five of the Beginner's Guide, and we're going to be looking at the history of bitcoin. With your boy Marty Ben, going through some of the key events that shape Bitcoin and why they're important, why you need to know about them. Anyway, I hope you enjoyed this. You got any feedback? If you've got any questions, you can reach out to me. My email address is hellohatbitcoindid.com or also, if you want to support the show, head over to my website. Go to whatbitcoindid.com Click on the Support section. That will explain everything you can do. It doesn't matter whether you leave a review or you want to become a sponsor. Whatever you want to do, if it helps the show, it helps me. So I appreciate you. All right, As I said, you want to reach out. My email address is. Hello? What Bitcoin did come and have a great week.