Get Your FILL
E29 Cedric Dahl Pt 1

Cedric’s recent appearances:

      • ‘The Bitcoin Podcast’ – Link
      • ‘What Bitcoin Did’ podcast – Link
      • Conversation with com‘s Roger Ver – Link
      • The story of Cedric’s startup ‘Buttercoin’ – the 1st ever regulated Bitcoin exchange backed by Google Ventures and Y Combinator – Link

Cedric’s social media:

      • YouTube, 69,400 subscribers – Link
      • Twitter, 4,000 subscribers – Link
      • Newsletter, 21,000 subscribers – Link

*Intro and outro music are from an original piece by

Carl Zukroff of The Blue Hotel

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You have stumbled on to another episode of Get Your FILL, Financial Independence and Long Life, where we explore ways to achieve those two goals. A couple weeks ago, I pooh-poohed this whole virus scare as a lot of drama. Since then. I’ve done some research on it and it’s no joke. You can have all the conspiracy theories that you want, but it’s real and it’s here and to get rid of it, all we have to do is just all stay home for two weeks. If we do that, everyone who has the virus should know they have it, and then they can continue to stay home and the rest of us will be able to go back out and get on with our lives, and mingle with other healthy people who we know their healthy because they haven’t seen any unhealthy people for two weeks.
I mean, I get it right. We’re Americans, no one can quarantine us… We have a constitutional right to go to Home Depot.
Yeah, you do, but maybe for two weeks, we could all exercise our constitutional right to just stay home and stay healthy.
Okay, that’s enough of that. This week’s guest, Cedric Dahl, is in a league apart from most of us in terms of understanding crypto currency, the darknet and how all that blockchain-ey stuff works. You gotta check out his complete bio on the website, which is because he is a fascinating guy, but I’ll just give you a couple of highlights. He got into Bitcoin when it was $3. He’s got 10 years of experience in the crypto industry, and he’s been advisor to all kinds of people and companies and people who need to know more and understand more about blockchain and crypto-currency and industrial mining and all that kind of crazy stuff that I don’t even have a clue about.
So Cedric, Bitcoin has lost a lot of its value lately. Is this the right time to buy?
Cedric: I think the… What I can say is the advice that I gave my parents, which is: cash is king.
Yeah, and I think that there’s three time frames that I look at this, and there’s the short term, which is like the next one to six months, there’s the medium term, like six months to two years, and then there’s the long term like two plus years and I think that things are gonna be very different across those three-time horizons right? So for the next short- to medium-term from now to two years, I would say that Cash is absolutely king. So very few people have the cash to last two years, which is a really sad state of affairs but that’s just the reality.
And most Americans are not prepared for retirement.
It sucks, but it is what it is. So if you are prepared for retirement, the question is: Do you have enough cash, the last two years or are you dependent on investments to help you with a fixed income? If that’s the case, I can’t give the listeners advice because I’m not a financial advisor, but what I told my parents I take all of your money out of the… Take all of your money out of these high-yield or really any yield investments to just get them in cash, because these yield-seeking investments are taking risks and they’re making investments on companies and you don’t know what those companies are and some of those companies could be adversely affected either legitimately, because their business is stopped because of this virus or not legitimately because there’s a panic in the market, but cash will be the thing that I think is relatively the most stable for the short- to medium-term, which I think seems obvious to most people paying attention.
Something that’s less obvious is this idea of crypto right? So I’ve been in Crypto for 10 years and I gotta tell you, even though I’ve been in Crypto for 10 years, I don’t feel like an expert. It’s such a wide topic but one thing I feel pretty confident about is that, in the short term like zero to six months, it’s unlikely that crypto will be a safe haven asset. I think that the thing that people really don’t appreciate about crypto is that the majority of people who are investing into Crypto are very likely retail investors.
So what is retail? What other kinds of investors are there? Well, let’s put them into three buckets. You’ve got everyday people like you and me, we’re retail. You’ve got professional investors, people managing other people’s money for a living, and for them to do that, it has to be north of several million dollars, right? And then you’ve got the biggest investor of all with our governments or nation state actors.
Now, the thing that I think is really underappreciated is while there is crypto-adoption across these three markets these three actors: they act very differently in different situations. So, in a financial crisis, I’m not saying that we’re in one although personally, I think we’re probably heading towards one – not to be an alarmist, but if there is a financial crisis, the question is would this retail group, can they afford to hold? And the short answer is no, for the most part, unfortunately, the vast majority of Americans, for example, they have no savings. When surveyed, I believe it was by Fannie Mae, I forget the exact government agency that did the survey, but when they asked: How would you pay for a 400 medical bill? The vast majority of Americans who responded said, I would have to put it on a credit card because I don’t have the savings.
So if we use that as an indicator in the situation, the situation is not good.
And I think that the few Americans that can afford to have savings are gonna want something that’s more stable than internet money, right? Now there are a very small subset of people in the world who actually need internet money who actually require something like Bitcoin to survive. And so the good news is that if you’re a diehard believer, there’s probably a floor that is or by adoption of the very few cryptos that actually are used for something outside of gambling on price, which you can count those on one hand. By the way… It’s an extremely small number.
So what about these other two markets? Well, it doesn’t look like the professional investor market is big enough to support the price. It also doesn’t look like governments have really started to move into Crypto and a significant enough way to support the price. So that’s what’s true today. But all of this stuff is changing, so the government is gonna do some weird things if we do go into a financial crisis. I’m not saying we’re in one, but if we do go into a financial crisis, the number one powerful lever that the government can pull is the money printing lever.
You have to understand that every currency that has never existed has failed without exception. Some people would argue, or the US dollar hasn’t failed. And if you’re a historian, you realize that the moment that the US dollar switched off the gold standard, the value of every dollar has started to fall, and since that time it’s fallen by more than 90%. I think most of us would call a currency that lost 90% of its value, a failure.
So the question is, at what point does money printing lead to hyperinflation?
The short answer is nobody knows, but I suspect it’s not gonna be in the short term, I suspect it will take longer than six to 24 months, but I don’t know, nobody knows, but at some point, depending on how this all plays out if people – and really other governments – lose faith in government back currencies crypto is sitting there at that point, crypto would become a safe haven asset but today, crypto is not a safe-haven asset. You know, I’m pulling up the values of different crypto in the entire crypto market overnight has basically lost 25% of its value.
I wouldn’t call that a safe-haven asset. Now, let’s compare it to the Dow Jones, for example. And I love crypto, I’m a crypto advocate but I think you have to be really objective. So check this out, alright? The Dow Jones is down 10%, I believe that’s from yesterday, and so 10% for the Dow Jones, more than 25% for crypto.
So it seems like crypto is not only correlated, but it has an amplified reaction, at least in the short term, for now, unless something changes, unless professional investors and governments start stockpiling the stuff, if we head towards a scary financial situation, I very much doubt that people would rather have crypto as an asset versus buy bread or a can of tuna or something like that. Yeah, exactly, so that’s my short version of my thoughts on crypto at the moment.
Chris: So I guess not knowing exactly who might be listening, can we just back up and just give us a real kind of overview of… I don’t want you to dumb it down but imagine that you’re explaining to someone who just woke up from 100 years ago and doesn’t understand the whole crypto phenomenon, how it works and what it’s all about.
Cedric: Yeah, I’m happy to explain it. So a lot of people explain crypto in a really hard-to-understand way. So I’m gonna try to explain it simply. Now I’m doing that, I’m gonna gloss over some things and the description that I’m gonna give is not gonna be a technically, 100% comprehensive explanation but it’ll give you enough to understand what is going on here.
Okay, so 2007-2008, we have the Financial Crisis, right? Shortly after that, early to sometime in 2009, somebody basically says, “Hey I think I have an answer to money being unfair, right?” Because it was pretty clear that even though everybody was hurting from the financial crisis, not everybody got bailed out. It was just the big boys with friends that got bailed out.
So, what about the rest of us, why did this happen? Why was it that the people who created the problem didn’t get punished for hurting the rest of us? And the short version is, today we have a referee for our money and that referee is whoever has the most guns. That’s the general idea right now.
I’m not belittling the government, the government’s amazing, governments everywhere do a lot of good, but this is just the reality is that the people with the guns, they make the rules. So when you have a power asymmetry where one group has more power than another group, when things go bad, the group with more power is gonna help themselves first, and then they’re gonna help their friends and then after that they’ll help whoever they can. But this is the order that it happens in… And I think we all generally, from observing human nature, see this. I don’t think I’m gonna get many people disagreeing here.
So when it comes to money, the question is, “Do you need a referee?” And for the longest time, the answer has been, yes, you need someone that you can trust to make sure things are happening in a way that makes sense, right? And so, the way that this plays out in the United States is courts. If you and I make an agreement and one of us doesn’t like the way that the agreement played out, we go to a court and the court decides who’s right and if you don’t do what the court says, they point their guns at you and that’s scary, right?
So, what Bitcoin did in 2009, it proposed a new way to make money fair, meaning no referee needed and no participant in the money system would have any more power than any other participant. This idea of fair money is completely new. This has never, in the history of humanity, ever existed. Now, a lot of people ask, “Well, how did they do it?” And I’m gonna give you again a short version, which is it’s all about a clock O’clock.
What do I mean? Why am I talking about clocks? Well, if you think about the way that normal money works right, the men with guns hire a spreadsheet keeper. This is a Central Bank. The central bank’s job is to have a big spreadsheet of every single person and how much money they have, and when I send you money, the bank updates the spreadsheet, and the way they do it is they say, Cedric has $5. He took one of those dollars and he gave it to you at 4 o’clock, right?
And so Cedric had $4 at 4 o’clock. And the reason that that time stamp is so important is because it doesn’t let me spend that dollar twice, right. If I send you a dollar, meaning I went from $5 to $4 and then I tried to send somebody else $5, because we had that timestamp that said I had one less dollar at that time. Cedric, you don’t have $5, but you need that timestamp. Now historically, you needed to have a trusted group do that timestamp. But what crypto does is it says, you can have that timestamp without a central trusted authority and the way you do it is instead of having one group that’s been given a permission slip by the government stamp it, you take away the permission slip and you let every single computer in the world be a part of that stamp, and suddenly, you’ve gotten rid of your referee, and suddenly you have the first experiment at fair money, but you gotta understand: this is an experiment. No one knows if it’s gonna work, but wow, has it been working so far!
Chris: So how did you first find out about it?
Cedric: Does that help?
Chris: No, that’s great, it’s interesting ’cause I hadn’t heard it described exactly that way before and it’s nice, it’s interesting. It gives you a nice context for kind of grasping the whole bigger picture.
Cedric: Cool, well I’ve been failing at describing it for 10 years and in life, you either win or you learn. So in other words, I’ve been learning how not to describe it for ten years so I hope that this evolved explanation is helpful.
I first got into Crypto, in 2010. My very good friend told me about it, I think in late 2009. It was just an idea at that point. It wasn’t live, it wasn’t something you could use. And he’s like: Cedric, you gotta pay attention to this. And I was like, “Hey this is too hard to understand. What does any of this mean? He’s like: I’ll explain it to you. So for the next week, he explained every single part of it, every single day until I finally got it.
When I got it, I told him, I said, “Bennett, this is dumb, it’s never gonna work.” And I ignored bitcoin for almost the whole year and every day he would nudge me. He’d be like, “Hey we should pay attention to this. And then eventually, about a year after he first brought it up, he’s like: Cedric, people are buying drugs with Bitcoin on the darknet. And I was like: What? This is extra dumb. Why would you do something with this internet money that is so easy to reverse-engineer and figure out where it came from?
They’re gonna get caught. This is dumb, this, it’s a stupid… And I looked into it and what I realized is it like: Oh, there’s actually something here, because there are people, groups, and governments using the Internet and this new internet money to do things that other people, other groups and other governments may not like them to do. And the reason that I was so sensitive to this personally is because my grandparents survived the Holocaust, where their government murdered their friends, took every single thing that they owned, took their houses, seized their bank accounts, they literally ripped the necklaces off of my great-grandma’s neck so that she couldn’t take any value out of the country.
So from a very early age I had been raised with these stories of – hey Cedric, at any moment you’re one regime change away from losing all of your wealth, so always look for ways to preserve or safeguard your Wealth. And so from that moment that I saw people groups, and governments using the darknet to do things that others may not like them to do. I was like: Oh there might actually be something here. So that’s when I started paying attention.
I got really lucky right place, right time, right friends. I ended up falling down the crypto rabbit hole at just the right time. We ended up building the first regulated US BitCoin Exchange, and we had back in from Google Ventures, Y Combinator, which is the most prestigious technology incubator in the world, and we really went down the rabbit hole pretty hard for a few years on new internet money and normal money and in doing so we just learned basically everything we could about both of these worlds.
And that was about 10 years ago that I started falling down the rabbit hole. And I’m just trying to be as honest and objective as I can about crypto. And the reason I do these conversations is I’m looking for polite disagreement because I’m at this weird point where there’s so much that we don’t know, but so much that we think might play out, that all we can really do is share our best map of reality and ask for people to tell us where it might be wrong. So what part of the map should we look at today?
Chris: Well, I was wondering in the notes that you sent me ahead of time, you’re talking about the government adopting Bitcoin, but don’t you think they would come up with their own cryptocurrency or do you think they would adopt one that’s already in existence?
Cedric: Well, they already have. The word crypto-currency is used unfortunately, incorrectly. It’s used by most people to describe digital money but digital money has existed for a long time, right?
You could say that digital money. He first started to exist as soon as the first bank got a computer. And put their spreadsheet in there, right? So data money’s been around for a long time.
The reason that cryptocurrencies are very unlikely to ever take off it’s because of that referee that we talked about. The whole point of a cryptocurrency is that you don’t need a referee and unfortunately, every government wants to maintain its power asymmetry. That’s why governments have armies, they are trying to say we have more power than our citizens. We have more power than other countries. If you mess with us, expect to fight. Right, because there was power asymmetry.
So whether it’s the Chinese yuan or the US dollar, any time a currency has a power asymmetry meaning there is one issuer who can reverse transactions as they see it, there’s very little incentive for other countries to use that currency, if they are sanctioned, which by the way, those are the countries who first adopt this.
It is the people who – if you put this in medieval terms, their castles have been cut off so they can’t get supplies. So, I love the United States, I live in the United States, I’m a big fan of the United States, and I’m not trying to belittle the US in any way, but think about what’s happening here.
The US performs sanctions on North Korea. They perform sanctions on Venezuela and what happens? These are the first countries that have either publicly announced that they’re setting up infrastructure. This is all on the internet, this is not a secret, this is not information that people aren’t aware of. So, Venezuela has announced crypto infrastructure to get around sanctions.
We also have folks like North Korea, who have leaked information that they’re setting up crypto infrastructure, so we know for sure that this is happening. Now, these governments are also trying to issue their own currencies.
There was the Petro dollar issued by Venezuela, which apparently seems to have largely been a failure. It was basically an IOU from Venezuela to what appears to be China. But the question is like, why would a disadvantaged country, use a currency that maintains their disadvantage if they can – all other things being equal – choose a currency where every single person in the system has the exact same power. So the worst-case scenario for them is power symmetry, meaning: fairness, right?
So if you think about who has the incentive, what countries have the incentive to adopt this, it’s any disadvantaged country is more advantaged if they adopt, and more better off, if they adopt fair money, and every advantage country is worse off if they adopt fair money, right?
And so the question is: How many advantaged countries are there and how many disadvantaged countries?
And the sad reality is that the vast majority of countries are disadvantaged, so there’s actually many more times the incentive for countries to move to fair money than there is for countries to stay with the current structure of unfair money.
Don’t get me wrong, I have benefited tremendously from the advantage that the United States has being a United States resident and loving living here. But I think that we have to have this conversation because if we don’t have it, and this plays out and our country, whatever country you might live in, is the last to adopt, they are the worst off.
Because when you look at any market, you have what’s called an order book. You’ve got people who are willing to sell, people who are looking to buy, and the amount that this stuff costs is very low initially, but as more people adopt inside of a population, you do what’s called sliding through an order book. You’re going through, what would be called bid/ask walls. You’re progressively paying more and more for every new unit of something you’re buying and so if governments are buying – and we know that they’re using the darknet and on the darknet, the only currency that exist is Crypto and the dominant crypto by a landslide is Bitcoin – so it’s pretty clear to connect those dots and say governments are buying Bitcoin. They are, it’s just all the data’s there. I invite polite disagreement, but bring data if you’re gonna disagree.
So if this is the case, at what point do you have the tipping where it goes from an advantaged country being in their best interest to not adopt, to advantaged countries now all of a sudden not wanting to adopt last, not wanting to be the last group to pay the highest price. So that’s something I’m trying to get smart about now. I don’t know when that inflection point is but if I had to guess, I would take the traditional model of technology adoption, which from my understanding of studying this stuff for about a decade, it looks like once about 13% of a population adopts some piece of technology, that’s the beginning of mainstream adoption, and that’s generally where you seeing explosion of adoption? So let’s do the math. There’s only about 200-ish countries, a little bit less. So if you think about it, what’s 13% of 200? 26, so once 26 countries announce or leak that they’re setting up crypto infrastructure, it’s my opinion that whatever the leading crypto on the darknet is at the time, will very likely become some portion of global reserve currencies.
But we’re not there yet, we’re not at that point. And so I think that anything before that is basically early and that crypto is not a safe-haven asset at that point. And anything after that we’re late and crypto is a safe haven asset but it really depends on this market that no one talks about which is governments adopting, and it doesn’t happen overnight and it doesn’t start with advantaged countries. It starts with disadvantaged countries. And so if you believe that this has a reasonable chance of happening, it’s worth paying attention to because governments control all of the money in the world, and so if you’re looking for some event that could drive bizarre increases in value, it’s in the market where the fewest participants can make the biggest difference, and it’s not retail, and it’s not professional investors. In my opinion, it’s the government.
Chris: So, can you just quickly give an overview of the darknet?
Cedric: Yeah, so in the, I think it was the 1990s, the US government had to make a decision on whether or not they were gonna make encryption legal. It wasn’t really clear if you could make encryption legal, and so encryption, in short is: you have two keys, right?
A key that anybody can use to send you information and a key that only you can use to access that information. Basically, it’s a secret using math, that is what encryption is. That is what applied cryptography is secrets with math. So, should we make it legal to have secrets with math and in the ’90s it was officially decided, yes.
Now, this was a really important moment because it allowed you to basically interact with other people without everybody being able to see what you were communicating about. Now, this decision to make, applied cryptography or encryption legal along with this invention called TOR started the darknet. So in short, the darknet is basically any gray or black market activity on the internet.
Anything where it’s either not clear if it’s legal or it’s illegal, that is done on the internet is considered the darknet. Now, this could be information. It could be censored information in China. It could be the cost of the US dollar in Venezuela. These aren’t necessarily bad things morally, they’re just things that a government may not want you to talk about that may be getting censored for whatever reason.
So, this darknet really started with a combination of TOR, which is a technology created by a US military. I can’t remember if it was the Army or the Air Force, I believe, it was one of them. But basically, what TOR allows you to do is allow you to have websites that don’t have a name instead they just have a long string of characters, numbers, 1257!FG72. I just made that up. But it’s not a normal easy-to-find kind of website you have to… It’s kind of like a members-only website where you have to know the URL, the name of the website to get there.
Chris: You can’t google it.
Cedric: Yeah, once you’re there, you can really have anything there. Now, the reason that the blackmarket exists here is that the way that domain names work today: when you type in, it goes to an international, government-regulated list, which is maintained by this group called ICANN. So ICANN is kind of like… There’s a bunch of governments that vote on how they do stuff, but basically, if any government doesn’t want you on that list, they can just cut off your internet access. So if Google upset the US government, the US government could be like… I can take down Google or point Google at my website and I’ll put up what I want to show there, instead of Google having control over it, right? So anytime something either questionably legal (grey market) or definitely illegal is on the internet, the government can intervene and point website addresses at their own websites instead.
This is changing by the way, right now but until right now, because the technology to change this just came out like days ago, by the way… Because of this, all of these drug markets or information markets or sensor information websites have been in these TOR-hidden services. Meaning, you gotta be a member, you gotta know that this exists to go there. But, this has just changed.
Because what’s happening is, groups are figuring out a way to get rid of those referees of the list. This is what internet money is really all about. It’s about getting rid of the referees because unfortunately, referees make mistakes and they can be corrupted.
And so, it wouldn’t surprise me if in five years you could open up your web browser and type in: and go to a place that sold a variety of items.
Chris: Oh, here’s my heroin supplier.
Cedric: Yeah, and these websites can’t be taken down. And that’s kind of the point, is that the darknet today is very primitive and that if the people get caught, the government can take the website and put up their own website, right?
They can tell ICANN, the group that has the list of all the websites, to stop pointing Google at Google and instead point it at their computers but this is done. It’s like we’re at the beginning of the end. It’s not gonna change overnight, but it’s changing over time. It’s almost certainly gonna get adopted and it’s gonna get adopted by the people that have the biggest problem first, so who’s got the hair-on-fire problem, right?
So you hear a lot of big companies talk about Blockchain like IBM. Oh my God, it’s just such a scam. On behalf of the IBM sales people. Shame on you… IBM, big time ’cause there’s no reason to build anything with a blockchain unless you need censorship resistance and the only reason you would need censorship resistance is a government doesn’t like what you’re doing.
This is one of the reasons why the Russian government, I think, on the 11th – is today, the 12th? So that would make it yesterday. Yeah, so as of yesterday, the Russian government is trying to find any researchers who can help them stop unstoppable internet money, but that’s kind of the point of unstoppable internet money: it’s unstoppable. You literally cannot stop it. And so we’re going through a phenomenon where the Internet is restructuring how humans coordinate and it’s creating its own assets like the internet has just created the ability to have a list of names that when you type it into the internet, you don’t go through this government-controlled list you go through a list that was created by having an alignment of interest across a huge variety of people and the result is like fair internet names, the first time ever. You’ve also got, with Bitcoin, it introduced the first ever experiment at fair money. And so there’s this really weird expression in technology investing which is like: look for a large market with incompetent players, and I love government, I do, I love, I love my government. I think they’re amazing. But look how long it takes to make a decision and look at the speed at which the Internet is changing. It’s not gonna favor bureaucracies right?
And so we just gotta be pragmatic about this stuff, we gotta just have practical conversations. And so as investors, practically speaking, this internet money stuff is looking really interesting. Now, there’s an enormous explosion of scams in the space, but the best way to figure out what’s a scam and what’s real, is: what problem is it solving and you can count on one hand the number of crypto currencies that are actually used in any way, shape or form outside of speculation. So, it’s an extremely small list. So I think the skill that people are gonna develop, the ones that will basically survive as investors, will be the ones who can identify how this technology is actually used – not how the promoters of it say it will be used, but they will actually be able to go to the places where it’s being used and see first-hand. Oh, this is actually being used to, for example, seeing how Bitcoin is actually used on the darknet.
So one of the worst perpetrators of this is this really terrible project called EXP or ripple. And it is my opinion that the people who promote this project, grossly misrepresent what this does or who uses it. It’s by and large just people who have been convinced by a meme. Oh, it’s Crypto for bankers. Bankers don’t eat crypto, right? Bankers are hired by governments, there’s no censorship resistance needed for bankers, not zero. They own the spreadsheets, they can update them whenever they want. Yeah, having a spreadsheet that they can’t update is against the whole model of banking.
And so I would just encourage extreme skepticism inside of anybody thinking about investing in cryptocurrency and I think the most important thing you can do is try to understand real adoption and how to actually see real adoption and that it’s growing over time, for a specific crypto, I think if you’re gonna spend any time in crypto, I should be doing that – just understanding who needs the stuff and watching if more of those people are actually using it.
Thank you, Cedric, for starting my education and thank you listener, for listening. Tune in next week for Cedric Dahl, part two. And in the meantime stay healthy and stay home!