You have stumbled onto another episode of Get Your FILL, Financial Independence and Long Life, where we explore ways to achieve those two goals. If you missed part one of Cedric Dahl, go back right now and find it. Cedric got into Bitcoin when it was $3 and Vladimir Putin’s right-hand man in the US spent an entire day with Cedric and his team to get smarter about blockchain so you don’t wanna miss a word.
Chris: You touched on blockchain and I think I’m not alone in not 100% understanding how – I understand how it works but I’d still like you to just touch on that, but also how would you view it? So it’s supposed to be like it’s there: you can always see how much everybody has on their virtual spreadsheet. How would you do that? How does that happen? I guess I can’t be alone in being ignorant about that whole process.
Cedric: Honestly we’re all ignorant about it. The truth is that there are zero experts in this space, because it is so wide and so hard. I don’t know how to describe the simplest way to look at the spreadsheet. It’s pretty easy to look at the numbers on the spreadsheet, but they’re not gonna tell you anything meaningful.
You have to zoom out. Well, I guess the first thing we can do is ask a more specific question which is: how do you see if anything meaningful is happening with any of these projects? Are they doing anything for anyone?
I think the way to do that is to look, not at the spreadsheet itself but instead, to look at the markets, where are the censored markets?
And so today, that’s the darknet, it’s entirely the darknet and I think that that’s the only place that you’ll see this technology be used – outside of gambling on price because you have to use a censorship-resistant technology or you will be censored. It’s just that simple. And so I would encourage people to ask: who’s got this problem where they’re being centered and is the amount of censorship growing or shrinking.
And the simple way to think about this is: what has become one of the most valuable assets that was not valuable 20 years ago and I think we all intuitively know, it’s data. Data went from being barely valuable to being the most valuable thing, right? These companies that are exploding in value, what do they do, they sell your data, right?
So Google, they sell your data to advertisers. Amazon, they sell your data to advertisers. Facebook, they sell your data to advertisers. Instagram, they sell your data to advertisers. So there’s a pretty clear theme here.
Now, in terms of data, so there’s this explosion of data. And what about censorship – is there an increase in censorship? Well yes, obviously. If you look at China, they have a whole firewall and there’s people who find ways under, around and through the firewall, but it exists, and it’s pretty beefy. Russia for the first time ever experimented with shutting off the external internet, and only having a Russian internet, Russia-only internet.
So is data first of all, increasing? Double yes. Is censorship of that data increasing? Double yes. So is there going to be an increase in all of these things in the future? I think so, and that’s really what internet money is about. It’s this really unusual bet that every single human on the planet can make on whether or not humans will want to not be censored. And I think we all know the answer is obviously yes. Now in my mind, it’s not a question of whether this is morally right or wrong, it’s a question of is this a part of human nature? And I think the answer is yes, we all want fairness, and unfortunately, the vast majority of us have less power than the people in charge and so, not by any conscious choice, just by – what’s that expression, water finds its level – it’s just what it is. Human nature will drive the adoption of these censorship-resistant technologies and by no bad intention on behalf of governments, just the way that they’re structurally set up, the number of laws inside of governments, it only grows. Laws don’t come with an expiration date. The moment that the first black market was ever created was when the first law was created, right?
You couldn’t have a black market until they were laws. Laws have only unidirectionally grown. They don’t go away. And so really what that means is that with every new law the size of the black market is growing and it can only grow so much before it absorbs new people who just need some illegal technology to survive. It’s just a really basic question: if you keep making things illegal, at what point is eating illegal, right? And historically, that’s happened by the way, it’s been illegal to make food, to sell food, to distribute food and so these are not new problems, it’s just that we have a new solution, and it’s being adopted. It’s not being adopted by the people that a lot of folks think it’s being adopted by – retail investors. No one cares about buying Starbucks coffee with crypto, it doesn’t matter, it’s irrelevant.
What’s a lot more likely is that sanctioned countries will adopt it because they need to. Their partners who need to trade with them will adopt it as a means of trade and eventually advantaged countries won’t wanna adopt it last and so they’ll adopt it in an effort to not adopt to last.
Chris: Isn’t there – because it’s out there, because it’s available to everybody more or less on the internet – you want the anonymity of it, you want this concept that you are going to be able to have this thing freely but couldn’t governments crank it down, couldn’t they make it so that you can’t do everything freely? So if there’s some sort of a gatekeeper or there’s some kind of – like Russia, if Russia closes down and it’s only the Russian internet then no matter what currency you have, you can only trade it in Russia. Am I missing something there?
Cedric: This is the really hard part about wrapping your brain around all this: the short answer is that it’s probably unstoppable. As far as we can tell it looks like it’s actually, legitimately unstoppable. There’s no going back in the box on this one. Probably.
Now, there are a lot of different attacks that have been proposed to shut down Bitcoin and other internet money, but the crazy thing is, you can update the spreadsheet that we all have with a radio. The amount of work that you would have to do to shut this thing down, you’d have to confiscate every radio, any kind of circuit board that could be used to improvise an internet connection, you’d have to block all Wi-Fi signals across borders.
I mean, the chance – even if you shut down, first of all, shutting down the internet is extremely unlikely, but even if you went to the extreme of shutting down the internet, you would have to go further. You’d have to shut down all radio waves, which I don’t even think that’s possible. It’s just radiation right? That’s like trying to block the sun.
Maybe there’s something that we haven’t come across yet but our best map of reality says: No, you can’t stop these unstoppable technologies. There are potential attacks, but they’re very unlikely to happen. The amount of resources required to do these attacks might actually be more resources than governments can mobilize and deploy. And these attacks don’t happen overnight, they require a significant amount of lead time, and there are so many vested interests along the way that it would probably… almost certainly leak along the way ’cause there are probably people in governments who are savvy, who are hedging themselves personally, who have internet money, and if they realize that there was gonna be an attack on internet money, it’s just insider information, they’re very likely gonna sell, and if they have significant positions, it’s an indicator of the market.
And so, I would be very surprised if Russia or anyone found a way to shut down internet money. I don’t think it’s possible at this point. And it all comes back to that one simple idea which is, there’s no more referee. There’s no more central point of failure. It no longer exists in this new internet that’s emerging. It’s literally unstoppable.
Chris: This is another naive question, but… So if I’m a government and everybody’s transacting everything with internet money, how am I gonna tax them?
Cedric: Well, they won’t. Internet money is really impractical. The folks that have the largest incentive to use internet money are actually governments, disadvantaged governments. And so, I don’t expect that we’ll ever see a reality where you’re buying coffee with internet money. That seems like a terrible use of resources.
You’re actually better off using a bank to update the spreadsheet. It’s a lot faster, pretty cheap too. It’s not a big deal. What I think is much more likely, is that governments will be using this because they have to, not because they want to, because they have no other option for trade. And their trading partners, again, there’s just no way to send them US dollars, if they’re interacting with Venezuela, or North Korea, and so they just have to use something else and whatever the most liquid internet money at the time is, which, again, it all comes back to Bitcoin – not to try to only talk about Bitcoin, but it’s in a unique position relative to the very few other cryptos getting real adoption.
Yeah, it is very likely gonna really be governments that drive the adoption of this and governments that primarily are the users of this and governments provide many useful features, right? Fire departments, roads, basic infrastructure, laws, these are great things – like police, police are awesome.
I think we all agree that there are things that we would suffer if governments went away and so governments, I think, will continue to exist. They’ll continue to tax people and people will happily pay those taxes because they need the governments, right?
But the thing here that I’m saying is that governments are very likely going to adopt crypto and not just a few of them. I’m saying it’s likely that in some time frame – I don’t know what that timeframe is – all governments will adopt crypto. And really, it’s more of a question of: okay, which countries are gonna be the best off? And it’s probably gonna be the ones that adopt it first. Now they’re not gonna be the best off overnight, they’re gonna be the best stuff when all of the other countries adopt crypto, because what’s happening is as every later government buys crypto, they’re increasing the value of that crypto by putting some portion of their reserves into that crypto. And so if you’re in North Korea or Venezuela – and I’m not advocating that anybody do this if you’re in that government, I’m just laying out the game theory – if you make that bet, a small amount of crypto can explode thousands of times in value if even a small portion of the world reserve currency is going into that crypto right?
So this is a very large incentive for these disadvantaged countries to not only buy and to hoard, and not just to hoard for speculation, but to hoard because they’re getting sanctioned, they need to conduct their affairs. And this kind of goes back to where we all started which is what to think about crypto in a time of turmoil. Well, if governments are adopting this stuff, then that means that all of the money in the world is moving into it. At that point, it becomes a safe haven asset.
Until that point, it’s a risk asset, meaning when people sense risk, they’re likely to dump it. And we’re so early in the government-adoption phase, that I don’t think crypto today is a safe haven asset and I would discourage people from fleeing to it, until you see governments proactively adopting it.
Chris: But based on what you just said, you don’t see us replacing the US dollar with Bitcoin, so that you’d be using it for your everyday transactions.
Cedric: No, I don’t think normal people should hold crypto and I’ll tell you why. It’s hard. It’s so, so hard to own crypto. One, it’s terrifying, because you have these things called private keys, and I have lost more of these things that I would ever care to admit to. The thing is, unless you’re willing to have the responsibility of a government – which is an enormous responsibility – you just should not have this power because with power comes responsibility.
There are very few people – I’m talking less than a one out of 10,000 – that can probably really understand how to manage their internet money keys. It’s too hard, and I have seen zero progress on making it easier. There are companies like Coinbase that say: Oh, we’ll hold it for you, you can store it here. But the truth is that a well-intentioned regulator or a bad-intentioned hacker can take that internet money, and there are zero take-backs when that happens.
And by the way, it’s happened again and again and again. Bank account haircuts happen all the time. Look at Cyprus. Cyprus reached in and grabbed a bunch of people’s money. Look at hacks that happened to internet money exchanges: Mt Gox, bad-intentioned hacker reached in and took all the money or a very large amount of it. And so you just have to be aware that there’s this expression: not your keys not your coins.
I think the best move that a speculator could make is: okay, if you’re gonna buy crypto and you’re gonna keep it on an exchange, just recognize that you’re probably gonna lose all of that money at some point. If you wanna get into crypto, the best two bets you can make – the easiest bet is to be in a country that is proactively purchasing crypto and takes good care of its citizens. That’s like the safest bet for humans, normal humans. If you are really dead set on getting all of the upside of crypto if governments do adopt it – and it does look like they are – then you have to understand how to hold your own keys and that’s gonna take some focus and some time and some work.
So if you’re willing to do that, wooo, the investors who do that are, in my opinion, they have a chance at having a very unusual return, but it comes with a lot of responsibility, which is probably outside the scope of what most investors are willing to do.
Let’s be honest, most investors wanna pick up a phone, talk to their broker friend – Sam, Bob, Phil, whatever his name is – and say: Hey, I like that new stock in this new industry. Can you give me some of that? Aw, thanks bud. But that’s the extent that most people wanna think about this, or my parents, bless them, they wanna do what they did in 2006, which is, “Hey, Banker Phil, what should I put my money in? And Banker Phil says, “Hey you should put your money into real estate by backing these mortgage-backed securities.”
Unfortunately, there’s just a huge disconnect. So if you’re not willing to do the work, stay away from crypto. If you’re willing to do the work, crypto could be the best return ever, but it requires a lot of work.
Chris: Interesting, you talked about Ripple and I’ve actually heard people talking about that before, how it’s such a great thing. It’s the best crypto and we should really go there. And so tell us why that’s wrong.
Cedric: I personally have a large amount of disdain because it’s my opinion that the leadership and – it’s just my opinion – that they have grossly misrepresented what they do. So there are two different things. There’s a company, Ripple, and then they issued a currency that was called Ripple, and then they changed the name because, I think, that they probably were afraid of getting sued for misrepresenting what they’re doing.
So this was originally started by a guy who, the technology was started by this guy who started Mt Gox, who managed Mt Gox and then he sold Mt Gox to the next person, and then when this next person bought it, it failed.
So this person, they’ve been in internet money for a long time, so they started this other project as well, called Stellar, and this project Ripple. Then this other business guy teamed up with him and he said: Hey, my last company – I think it was called Prosper.com – has been shut down because of regulation, I’m looking for something new to do. And so they were looking to basically create some kind of new internet money that could solve some new problems and they designed this thing where it didn’t do what Bitcoin did. It did not replace referees. Instead, it let a group of referees make decisions.
Now historically, when a group of people makes decisions for a large other group, it’s called a cartel and this is not to belittle cartels. Cartels are cool, they can do some cool things, unfortunately, price fixing can hurt us normal people but cartels can also do some good. For example: OPEC. The world runs on oil, without OPEC we’re all in trouble. So let’s just try to be balanced about our judgements on these things.
But what Ripple did is it basically said, “Look you still need referees, but you need a cartel.” And so, is there power asymmetry in a cartel? Obviously, yes. The cartel has the power, and so that’s what ripple is. It basically says: “Hey banks”.
Well, I should stop for a second. So they started with this cartel model, and they couldn’t sell it to anybody, so eventually what they did is they raised some money from Google Ventures, which is the same folks that gave me money. And as far as I can understand, the reason that Google Ventures probably – I’m guessing here, I’m speculating – I’m guessing that the reason they invested into Ripple Labs because this guy, I think his name is Chris Larsen who started Prosper.com, is awesome and he is. Chris Larson is an awesome guy. Prosper.com was an awesome company. He’s got great intentions and Silicon Valley tends to back founders that are awesome.
So, he has since left, he left quite a while ago. So did the guy who started the technology. They’re both gone and so the person who took over – it seems to me that what they did is they just kept trying to shoehorn this technology into a market that would use it, and they got some traction with banks, where they basically said, “Hey we’ll give you some amount of this currency, if we can do a test together.”
This is what it looks like to me. This is me speculating, I’m not saying that these are facts, I’m saying that this is what it looks like to me.
So a series of events happen. 2017 has ICO-mania. There’s all this hype around different coins. And I think that the company, Ripple, was trying to survive and they basically said, “Look this thing that we’re sitting on has exploded in value,” and even if ripple didn’t do anything, even if the Ripple company didn’t do anything wrong, people were misrepresenting what Ripple did. They were saying that this is the crypto that banks will use. Banks have zero incentive to ever use Ripple.
There’s no reason that anybody that is not getting paid by Ripple – there’s zero reason, there’s zero benefit to using Ripple in any way, shape or form. It provides zero benefits, right?
The only people who have made any kind of agreement with Ripple, like for example, MoneyGram, are the folks who are getting paid enormous amounts of money by Ripple to use it. So MoneyGram, I think they sold 10% of their company to Ripple, and now they are experimenting with using Ripple technology for their business. But if you look at anybody else who’s experimented with this thing, you realize instantly there is zero advantage to just going from one currency to another currency. There’s no reason to have Ripple in between because it’s just that one extra step. And so, what ripple did is when there was ICO-mania, they basically gave a lot of this stuff to potential partners and they also sold an enormous amount of it, to give themselves a very large bank account. And keep in mind, they just made this stuff up out of thin air. Nobody did anything to create this stuff.
Bitcoin for example: every Bitcoin comes from a receipt of destruction where there is a value of electricity that is destroyed to produce the Bitcoin. So in this way, updating the stamp of who has what when, requires resources. Like this world clock that we have for Bitcoin, it runs on a tremendous amount of money that is required to stamp it but with Ripple, there’s no money at all required to stamp it. And so what that means is, it’s extremely easy to attack the network, it’s extremely easy to hijack the network, but really none of that even matters ’cause there’s no reason to use the network. There are zero advantages, like literally zero. I’m open to polite disagreement, but there is not a single advantage to using the XRP currency in any market.
Now, I am very open to being wrong, but I’ve been studying this stuff for 10 years. Ripple hasn’t been around that long, but since Ripple first came out, I’ve been looking for any market that’s adopting it, outside of speculation and there are zero, zero, and you can’t count the MoneyGrams of the world who are being paid huge amounts of money to use this stuff. And the really sad part about this, is the people who get most hurt are the people who just believe the memes who just don’t have the ability or the willingness to think for themselves and they’re getting fleeced. And I think it’s really unfortunate.
Chris: Back to trying to get my brain around the whole thing. What you just said about destroying electricity in order to create Bitcoin, ’cause to me, that’s what I thought at the beginning, that someone just said, “Oh I’m gonna create this internet currency that I just pulled out of thin air.” And then just like the US dollar, it has value because people believe it has value, there’s just, it’s a faith-backed currency. But you’re saying, it’s actually something more than that.
Cedric: Bitcoin does not run on people’s faith in it, at all. Bitcoin runs on receipts of destruction. So the way that Bitcoin works is that there’s a release schedule, so there’s a basket of Bitcoin that goes out every 10 minutes to whoever has got the most lottery tickets and the way you get Lottery tickets is bring computer power to the network. Let’s say that you bring 10% of the computer power and I bring 20% of the computer power.
Well, if that lottery is happening every 10 minutes, that means in that 10 minutes, you get 10% of the tickets and I get 20% of the tickets, right? Either one of us could win. I just have twice the chance that you have because I brought twice the computer power.
So, this computer power is what is used to stamp that clock of what transactions have been done, when and it’s just too expensive to take over that network because there are more than 100-Goggles’-worth of computers stamping the Bitcoin clock every 10 minutes.
What’s the value of stamping the Ripple clock? There’s nothing in there. And not only that, it’s like even worse, there’s no reason to use it. Why not just – if you’re a banker – why not just use your own spreadsheet? All of these things are just updating spreadsheets. How is a bank not better off just updating its own spreadsheet? Yeah, I’d be really careful about believing memes. That’s the problem is one of the things about humans is: we share information that’s easy to share, not information that’s true. And so we often get suckered into information. That sounds good, not because it is good and that’s gonna wreck a lot of people, so just be careful out there and that wild world of internet money.
Chris: Yeah, definitely, but yeah, it’s just so big, it’s so far outside my – and I think a lot of people’s – frame of reference, that we’re just trying to get our whole brains around it. I’ve heard of college kids using their universities’ resources to do blockchain – I don’t know what you call the people who handle the stamping of the money and stuff like, “Oh it’s great. I’m just gonna take over my universities’ whole computing powers so I can get all these lottery tickets, but not really understanding a whole lot about the actual logistics of how it all works.
Cedric: So first I would like to always invite polite disagreement about anything I’ve said I’m a human. I make mistakes, and that’s kind of why I’m doing this anyway, I’m looking for where I might be wrong, so please do politely disagree with me. You can find me on Twitter, I’m @Cedric Makes if you think that I might be right and you wanna come along on this journey with me, I have a research group called the 1000x group. If you go to 1000x.report, we have a whole hour long video where we talk about everything we do, when we give away the information for free about what we track how we track it, we try to explain it in simple terms so that you can do it yourself.
At the same time, if you wanna save your brain juice and your time, you can join our membership, we have a monthly subscription service, where we just take all of these ideas and we actually pursue them with a rigorous disciplined approach. So again, you can find that at 1000x.report and I would love it if you would politely disagree with me on Twitter @CedricMakes.
Thank you so much, Cedric, for spending this time with us and for getting me to realize how much I really don’t know about blockchain and crypto and all that world that I need to start educating myself on and thank you, listener, for listening share it to next week when we talking to Michelle and Jeremy, two really sweet folks who have achieved their dream life through real estate investing. In the meantime, stay happy, stay healthy. Thanks for joining me today.