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Welcome to money for the rest of us. Our personal finance show on money how it works, how to invest in, how to live without worrying about it. I'm your host, David Stein and today's episode 1 67. Its title is Bitcoin Better at money than the dollar. Today we're discussing Bitcoin. I've not covered this topic on the podcast and over two years this episode 50 three. Should you invest in Bitcoin? And the better question is should you speculate in Bitcoin holding Bitcoin and other cryptocurrencies is a speculation because there's disagreement on whether the currency will appreciate or depreciate in value. So we're gonna discuss Bitcoin but first let me share another radical currency that came out many years ago right around the time the U. S. Civil war, prior to the 18 sixties, the U. S. Government only issued gold and silver coins and they were considered legal tender. Legal tender means they are recognized by the legal system as valid for meeting financial obligations. Paper money was issued but it was only, it was issued by private banks and you could take that paper money and redeem it for gold, assuming the bank had the gold, the bank failed. Your money was gone. But during the US Civil War, the US needed funds to support the war efforts and they didn't have enough gold. They went to the president Lincoln. Abraham Lincoln went to the new york banks. They wanted 24 to 36% interest to lend money for the war effort. A businessman from Illinois named Colonel Dick Taylor went to Lincoln in january 18 62 and suggested issuing this radical new currency, a currency that was not backed by gold, Taylor said. And this is from the Wikipedia article. Just get Congress to pass a bill authorizing the printing of full legal tender Treasury notes and pay your soldiers with them and go ahead and win your war with them. Also, if you make them full legal tender, they will have the full sanction of the government and be just as good as any money as Congress is given the express right by the Constitution. On february 20 5th, 18 62 Congress passed the first legal tender act. It authorized the issuance of 100 and $50 million of United States notes. They became became known as greenbacks because they were printed with green ink on the back side, but they were also very volatile. They weren't backed by anything. This was the first fiat currency. By the spring of 18 63 the greenback had declined to where it was worth 152 per $100 of US coins that were backed by gold, so they definitely had depreciated. But after, and then as different different battles took place after the victory at Gettysburg. The greenback recovered to $131 to 100 in gold. In I think the worst was in july of 18 64. It was worth 258 greenbacks per $100 of gold. And then after the war ended it was 100 and $50 per 100 dollars of gold. So it was very, very volatile, as volatile as Bitcoin because it was a new currency not backed by anything. By the mid 18 seventies, there was about 300 and 50 million dollars worth of these greenbacks or US notes in circulation. And in january 18 75 Congress passed this specie payment resumption Act in which authorized the reduction of circulation of greenbacks to $300 million worth and required the government to redeem the greenbacks for gold. And then this was going to be implemented by 18 79 in which case essentially the greenback strengthened because it was going to be at parody with gold and eventually was. And so you had us coins backed by gold and then you had US notes backed by gold. And then even after the Federal Reserve started issuing dollars, they were backed by gold up until 19 33 when the government banned private ownership and gold. You can no longer redeem Federal Reserve or US notes for gold. You can still redeem them for silver up until 1968. In which case all currency became fiat currency not backed by anything Federal Reserve notes and US United States notes. So these these greenbacks were issued up until 1971 and then they were no longer distributed into public circulation. The US went off the gold standard and it was that point money cash, us dollars became digital. It could be created at will by banks by simply lending. And I discussed that episode 94 how money is created and destroyed an episode 1 57. Money. What is money? I talked about? An episode 59 is gold money and there's some standard definitions. One of them is it's a store of value, a second, a unit of account and three a medium of exchange. We're gonna look at Bitcoin and see how it compares on that. But first the store of value. How has the dollar done as a store of value? Not so well. The annual inflation rate as measured by the consumer price index has increased at 4% annually since 1971. That means you would need $600 today to buy 100 dollars worth of 1971 goods. And how fast is this money supply increasing? Well, M two is a measure is a broader measure of money supply includes us dollars coins, as well as digital bank savings money market accounts. In august 1971 there was $685 billion of this measure of US money today, it's $13.2 trillion. That's how much the money supply has expanded and that is what leads and has led. Two inflation last year over the past three years, it's increased the money supply this M two by 6.4% per year. On average. Now let's compare that to gold. So there's $13.5 trillion of US money dollars. There are approximately 200 1000 tons of gold that has been in mind and is available around the world. And so that that's about 6.4 billion ounces worth it roughly? $8 trillion. And each year there's about 3000 new tons of new gold mine. Which means that the rate of increasing the goal supply increases about 1.5 percent per year. So it's increasing at a much slower rate than the money supply. Which is why over time gold should do better basically appreciate in the U. S. Dollars because the supply of gold is not increasing as fast as us dollars except it's also very very volatile because it depends all currencies depend on trust. Do you do people want to use dollars? Do they want to hold gold and and their level of trust and wanting to hold us assets influences their price. Now let's compare that to Bitcoin. There are 16.5 million. Bitcoin's essentially in circulation so that that's the number of coins and we're going to talk in a minute. So the Bitcoin is not really a coin but about $16.5 million total value 47 million. That's a total value of Bitcoin. And that's at a price of roughly 26 $100 per Bitcoin. Very very small. When you compare that to $8 trillion of gold and $13.5 trillion. Uh In terms of the U. S. Money supply. So Bitcoin is really really tiny and the algorithm that runs Bitcoin that sets how much Bitcoin is created per year. In the last year the number of new Bitcoin increased 4.4%. But from a very much smaller base so 4.4% of $47 million would be the amount of new Bitcoin created in the next year compared to 1.5% increase of gold. That has a base of $8 trillion and the 6% increase in the U. S. Money supply which is at 13.5 trillion dollars. And so when we look at the price a Bitcoin, I started getting involved in Bitcoin researching and pretty extensively in 2012, summer 2012. And I talked about this back in episode 53 was priced at $11 per Bitcoin in 2015 when I did the episode JD sent me a Bitcoin or some Bitcoin, he sent me 0.0 078 Bitcoin. It was worth a dollar 75 today. That Bitcoin which I still have is worth over $20 so that that is storing value. The value is going up because more people are trusting using Bitcoin despite its flaws, it's growing pains which will discuss but as more people trust it and want to use it because there's a limited supply and a set supply and in the amount of Bitcoin is not growing as fast as either gold or U. S. Dollars. Then then its price relative to those currencies is going up. Money is also a medium of exchange. In an episode 84 was money is trust. I said money facilitates exchanges that would not have occurred in a bartering economy because money acts as a symbol or token of value. Money requires cooperation and trust for to function properly and facilitate transactions. Trust is required because money has no intrinsic value. It has only symbolic value. Money cannot be used in its physical form to make something productive. You can't eat it, you can't build shelter out of it. You can't use paper money for heat by burning it in your fireplace. And money has value because we and others believe it is worth something in that it can be exchanged for something of value and it people believe Bitcoin has value and as a result the price is going up. But what is Bitcoin It? The first Bitcoin was issued in january 2000 and nine. The developer was a man named Satoshi Nakamoto. And but but it's not a physical coin it's not even really a digital coin. Bitcoins a digital record of previous transactions between various Bitcoin addresses that is stored in a digital universal ledger which is called the Blockchain. Now the J. D. Sent me 0.78 Bitcoin and I held it. I downloaded an app on my phone called Hive and that's that's where that pit coin was sent to because that had an address and so then there was a record of this transaction. But before I could spend that Bitcoin again it had to be verified. Again. Bitcoin is just this this record in the cloud of of Bitcoin transactions. And so the entities that verify transaction that J. D. Sent me a Bitcoin to my Hive wallet are called miners. And what they do is all these transactions six times an hour, about every 10 minutes. The transactions are lumped together and then they're put in what's known as a block. And then the miners work on a basically a mathematical algorithm that is trying to solve a particularly difficult math problem using the data from those transactions that are part of the bloc. So they're verifying the transactions are legitimate at the same time. They're trying to solve a mathematical problem. And computers around the world are competing to see who can solve and verify these transactions the fastest whoever is able to do that gets a reward of new Bitcoin 12 and a half bitcoins they get for achieving that and verifying it. But again, these are verified around the world on computer networks and then as I mentioned there's a limited supply of Bitcoins. So every 10 minutes new 12.5 Bitcoin are created in every four years. The because the essentially the amount of new Bitcoin reward is going to be cut in half. But they also there are transaction fees. So when JD sent me that Bitcoin, he paid a transaction fee, a smaller transaction fee to send me that Bitcoin. So the miners also get the transaction fees and that's what it's amazing system that isn't dependent on a central bank but it definitely is dependent on trust, do others trust and want to use Bitcoin. Now I had a quite slight problem because I forgot the JD sent me some Bitcoin. So I went to my phone and I looked for my Hive wallet and my app there and it wasn't there. So I went to the Hive website and I saw this big sign that said Hive is closed. Thanks for your support. They basically stopped development on Hive and I thought did I lose my Bitcoin before I answer that, let me share some words from this week sponsored. It's a new year time to do some things you might have been putting off and saving some extra cash. 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You can manage job post and contact candidates from a single view on the familiar linked in dot com as functions are streamlined under one simple screen. And now you can do all this from your mobile device no matter where the day takes you. That's how linked in jobs can help you hire the right person faster, visit linkedin dot com slash David to get $50 off your first job post. That's linked in dot com slash David to get $50 off your first job post terms and conditions apply. So it turns out I was able to get my Bitcoin back from not from Hive and I'll show you in a minute how I did that but there's there's an important component that Bitcoin you need to understand and this is from mastering Bitcoin. It's a book by Andreas On to Annapolis and he also wrote the internet of money and this guy knows a ton about Bitcoin and it's been very helpful in my education on the topic. He writes in Bitcoin. We use public key cryptography to create a key pair to control access to Bitcoin. The key pair consists of a private key and derive from it a unique public key. The public key is used to receive Bitcoins and the private key is used to assign transactions to spend Bitcoin. There is a mathematical relationship between the public and private keys that allows the private key to be used to generate signatures on messages. This signature can be validated against the public key when spending Bitcoin, the current Bitcoin owner presents her public key and a signature which is different each time. But again that signature is created from the same private key. And so in the transaction so there's a public key and a signature. To spend those Bitcoins through the presentation of the public key and signature. Everyone in the Bitcoin network. All the miners can verify and accept the transaction as valid confirming the person transferring the bitcoins owned them at the time of the transfer. So the key, the key pun intended I guess is this private key and public key. So what I did I went to, I searched online, I went to a website called coin dot space and I opened an existing wallet because Hive was open was open architecture. In terms of that mentioned that all other development code was was put in Git Git hub. It was full in the full source code and so other developers took it and basically a running virtual Hive wallet. So I open an existing wallet and because I had my 12 word pass phrase which unlocked my private key. I and I edited for my four to Japan I was able to access my Bitcoin because of this security that's built into it. And so then I sent it to a new wallet that I downloaded on my smartphone phone call, Jax J. A X. Now what's interesting about that in order to do that I had to pay a transaction fee. So my transaction fee to move it from the virtual Hive to my new wallet was point 00468 Bitcoins about a dollar five. And then I had to wait so immediately it showed up on my wallet but then it took 12 hours for that transaction to be confirmed to be recognized on the Blockchain, be part of a block and to be confirmed. So then I could spend that Bitcoin again. But it's all out there with these miners. Now the fact that it took 12 hours gets to a center of a current controversy controversy that's going on with Bitcoins. There's six blocks per hour, one every 10 minutes and the size of the blocks that the data storage is one megabyte, which means only about 3000 transactions can fit in a block. So that works out to about seven transactions per second. Compare that to Visa. Visa has 2000 transactions per second. So Bitcoins much smaller, much smaller processing rate in terms of transaction and it took a long time. Now I could have had it verified faster by paying a higher transaction fee because there's a priority in terms of which transactions get verified first, whoever pays the most in the fee they get priority and the longer it's been since the transaction showed up. So even if your feet was really low after time has passed, eventually it's going to get put in a block. Even those transactions that might not have any transaction fee. So eventually it took 12 hours. And, and that's been a huge controversy with Bitcoin because there's sort of in this civil war among different developers and those that are running mining software to expand the size of the block so that it can be, it can hold more memory so more transactions can be processed per hour. Now there's some disagreement in the way because there's no no one controls Bitcoin. It's just this this network of computers that run the software. And this is from an article in the US UK Telegraph says last week key miners and developers of Bitcoin agreed to adopt a new way of operating the Cryptocurrency since the technology is open source changes are made to its underlying code if agreed by a consensus of users. Now, this new technology is called Segue Wick two X S E G V two X. Sedwick two X. Proposes moving some a Bitcoin's transaction data outside the block and on a parallel track to allow more transactions to take place and then the block size would be doubled sometime in november. Now the competing proposals something called Bitcoin cash and they propose that the block size just be increased to eight megabits and today august 1st that there was, they never could agree. And so there's been a hard split in the Blockchain which means now there's Bitcoin and Bitcoin cash. This rival currency, it's a chain split. Now what this means is because Bitcoin is just a record of all prior transactions. Bitcoin cash and Bitcoin will share the there the block chain, the public ledger of all the transactions in the past but not going forward. And so now I had that Bitcoin I owned I now can have the regular Bitcoin and the Bitcoin cash. I own the same amount. I could spend it as Bitcoin cash, I could spend it as regular Bitcoin. But there's been a fork and this has never happened and it potentially will increase volatility even more because this is a young technology and again it depends on trust. So you've maybe seen some news regarding that, that's what it's about. It. It's two versions of the software now running all an attempt to increase the size of the blocks so that more transactions could be processed. Now one reason there was perhaps some reason not to do it is because the transaction fees are going up and so people were making money transaction could be the miners can make up to $5 per transaction sometime. And so there was an incentive not necessary to increase the block size but it looks like it's going to work out, we'll see it. So there's a hard fork and that just happened today now in order for people to trust a currency and to use it and to use it for exchanges, it needs to be secure. And there's been a lot of stories about Bitcoin not being secure. My friends had introduced me to Bitcoin back in 2012 when you spend a lot of time dealing with it, they lost all their Bitcoin, somebody got a hold of their private key because they stored it on their laptop which is not a very secure place because hackers if they can get the private key then they can control the transactions, they can access the public record and they essentially then control the Bitcoin. One of the major exchanges. Mt. Gox where I tried to buy Bitcoin was never able to do it, lost a huge amount of their Bitcoin because somebody access the private keys. That's the thing about Bitcoin. If you store it on an exchange then you don't control both aspects of public and private key. You lose, you lose control. Now that's not to say that you can't lose money in with regular currency. A local news report in Denver reported how a colorado couple lost their life savings while they were trying to buy their retirement dream home. They have filed a lawsuit with Wells Fargo Bank, the land title company, land title guarantee as the title company and Envoy mortgage, which was the mortgage broker as well as the realtor in the real estate agency. They lost their payment, they sold their house in Longmont and they were using $272,000 as a down payment. The mortgage brokers said in the morning you'll get an email from the title company where to wire the funds. The next morning they got a email, it matched the amount that the mortgage broker had said. And so they wired it turns out the title company, email servers have been hacked and it was a fake email and they wired it to the wrong account and they couldn't get their money back. And this is becoming more and more common because they just it was gone. And so there's used to lose money with regular currency. I was in new york last year a couple years ago I used an ATM in Brooklyn and I put my money in. Or no, I use my card, I took my money out and within days they were fraudulent transactions on my account because they had basically captured my ATM data, my debit card data in that ATM when you use a credit or debit card and that data is captured what you're sending. The card number. And the card verification code is often asked for as well as your address and all types of information. Andreas an Aunt in Oculus, right? Bitcoin is fundamentally different. What I am transmitting, transmitting is not the key but a simple signed message. It is an authorization. That authorization has two external references to where the money is coming from by referencing an unspent output on the Blockchain and to a reference to where I want to send the money by creating a new encumbrance, a new limitation on who can spend the money. Usually a public key or Bitcoin address. The transaction contains no sensitive data. If you steal that information in the transaction, all you know is which address the money came from, which address the money is going to and how much you didn't transmit your secret key. It was just there's a sign message that can be verified that the transaction is is legitimate but you can't lose the money unless you send it to the wrong address. But you can. And that's what I find so fascinating about Cryptocurrency. Bitcoin is here's a way to hold money that that has value because people trusted but hold it in a way that you're not dependent on the financial system to hold it. If I want to hold a let's say foreign currency digit digitally, how do I do that? I get emails all the time from members of money for the rest of us. Plus they want to open up an investment account. They live outside of the U. S. They're not U. S. Citizens and they want to open an account in us and it's very very difficult to do it if not impossible. It's hard to hold digital money in a way outside of your home currency. But with Bitcoin and other cryptocurrencies you can you can't hold it in an exchange but again by holding in an exchange you're exposing yourself to potentially that exchange being compromised. So when I buy Bitcoin I and I will be buying more Cryptocurrency as a speculation. I buy it on a website called I think it's called Coin base and it's linked to my bank account. And once I buy the Cryptocurrency I send it to either my wallet on my iphone where I have the private key stored or you can get an external USB wallet which I actually just just bought one by Treasure T. R. E. Z. O. R. And you can store it there and you can put that that U. S. B. Basically just has your private key and then it interacts with the Bitcoin or other Cryptocurrency network. But it's absolutely fascinating. I have no idea where the price is going right. We don't know how this hard fork will turn out in a future episode. Maybe next week we'll talk about other developments in Cryptocurrency such as ethereum ripple and and talk about initial coin offerings and some of the shenanigans going on there. But there was a book written I think a couple of decades ago by Clayton christian cynical innovator's dilemma. And it's talking about disruptive technology and talk about all the challenges with disruptive technology. It's not perfect it's good enough and if you see the path of Bitcoin it's just been good enough. There's been problems, there's been exchanges hacked, there's been fraud but and there's been controversy in terms of increasing the block size but all this time it's it's gaining trust. There are countries around the world where there's limits to being able to use currency and people are using Bitcoin because it's anonymous and it's secure because it's not dependent on having to interact with the traditional financial system. It does require trust. All currency requires trust, but here's a way to have a currency that's held outside of the traditional financial system. This is a way to diversify. This is an additional diversification but it's also speculative, it's speculative like holding gold because you're not sure if it would be positive negative, but I certainly am in the process of increasing my holdings of a Bitcoin and other cryptocurrencies. And because I feel a little regret because after that 2015 episode I bought Bitcoin about $5000. With a Bitcoin. It would be worth $50,000 today except I sold most of it in january 2016. After reading a number of articles by people that have been involved in the Bitcoin network early on that Bitcoin was dead because of this this Blockchain size issue. And because so much of the currency miners are concentrated in china and why are they in china? Because china has cheap power. If you can run the mining computers, the cheaper you can run them in terms of the power to run them right electricity. Then in the fastest processor you can get. Then you're more likely to win this competition that's going on globally to verify transactions and solve the algorithm. So a lot of computing power has gone to china that causes some concern but also this whole block chain size but these are bumps in the road. We'll see if Bitcoin continues. Maybe the price will crash by half. But this is a way diversifying and if the price crashes is because it lost trust. But everything I've seen is trust is continuing to gain in Bitcoin. Maybe it's there another Cryptocurrency is something will still have to explore. So that's episode one 67. Show notes are available money for the rest of us dot com. That's why you get signed up for my Insider's guide and I've changed the Insider's guide. Now, what I said in that weekly free email is I send the show notes. I also said a separate, basically newsletter things that it can be used to write a weekly article for the local papers. And then I would take that article. It was sort of a summary of some of the what I share in the podcast and I'd send it to email newsletters. I'm no longer writing for the local paper and I'm actually sending Insider's guide information they can't get elsewhere. In other words, this is content that's crafted just for these free email news subscribers newsletter subscribers. So it's free. You can sign up at money for the rest of us dot com or if a US based listener just text the word Insider to the number 44222 So go ahead and sign up and you get stuff you won't get anywhere else because it's just going to you. Everything I've shared with you in this episode has been for general education only. Have not considered your specific risk profile. I'm not provided investment advice simply. General education on money investing in the economy have a great week.
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