Are You Thinking About Investing in Bitcoin? – Episode 101

What’s with all the Bitcoin hype? Is it here to stay? More importantly, is it a viable investment option? In this episode of Dentist Money™, Reese and Ryan explain the origin of Bitcoin and its emergence in the market over the past few years. They examine the sophisticated “cryptocurrency” trading platform, highlight the pros and cons of owning Bitcoin, and share stories of investors who bought in (for better or worse).

Show notes:
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Podcast Transcript:

Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old co-host, Sir Ryan Isaac.

Ryan Isaac: Also known as Crypto.

Reese Harper: Sir Ryan Isaac, also known as Crypto, has invented a new currency for us to discuss today. He wishes he came up with it, because he would probably be wealthier than he is right now.

Ryan Isaac: Slightly. Not a lot more. A little bit more.

Reese Harper: Today’s episode starts with a surprising story about the history of the Netherlands. I would like you to tell this story, because I know it is one that is dear to your heart.

Ryan Isaac: Yeah, it is very near and dear, close to my heart.

Reese Harper: You tell it a lot, but you keep changing the tune about it.

Ryan Isaac: I do, I change it up. So in the Netherlands— which, you are very familiar with that region of the world, Q.

Justin Copier: Yeah, my grandparents are from there; I am actually half Dutch.

Reese Harper: You are? Really?

Justin Copier: Yeah!

Reese Harper: No wonder. Now it all makes sense.

Ryan Isaac: It is going to be a lot more emotional in the retelling of this tale (laughs). But in the Netherlands, in the early 1600s, you had this group of people, this class of people. A lot of them were scholars, and what they called gentlemen botanists, right? And they had these huge gardens; one was at the university, and then there was this other private garden from a guy named Carolus Clusius. He had this huge private garden.

Reese Harper: He seems like a typical gentleman botanist.

Ryan Isaac: Yeah. You know a few of those. That is your crowd of people.

Reese Harper: No, that is your neighborhood.

Ryan Isaac: (laughs) yeah, that is true. So, a particular interest in this garden was the tulip. Tulips had been around in gardens in Central Asia for hundreds of years, but they were brand new to Western Europe. And they were not just new, but they were seen as really exotic and rare. There were actually a lot of famous painters during that time who were painting things, and the highlight of their paintings were tulips. So, tulips started to get a lot of popularity; everyone was getting really excited about tulips in the community. People would go to the gardens, and they wanted these. Over the next few years, this group of people would start trading their tulip bulbs. So it went from being in a garden to, “you know, let’s start getting these tulips in the hands of other people who can plant them in their gardens.” It started to kind of pick up some steam; people were really excited about these tulips. Particularly, they loved these tulips that they later found actually was a disease, but at the time, all they knew is it caused this little stripe to be in flower part. In the petal, right? So, they thought it was a rare tulip, and it turned out to be a diseased tulip that couldn’t actually grow (laughs). But that was the thing they prized most. So, they start trading these things among each other for a few years, and it kind of gets to the point where there is quite a bit of excitement, and they are starting to pay for it. They are starting to not just trade their bulbs, but they are starting to sell them to people. It is getting outside of their network. Instead of trading among each other, these botanists, it is strangers that now want to buy these tulips. If you fast forward like a decade, this tulip market, it becomes a famous craze—

Reese Harper: We are talking about the 1600s.

Ryan Isaac: Early 1600s. This is like 1630s. It has now gotten to the point where it is now a market. People are paying very very high amounts of money for these tulips. It starts where a handful of bulbs are getting close to the price of like a house.

Reese Harper: Yeah, there was a quote that you found that I really liked from a historian. His name was Mike Dash, and he said something about— one bulb is what he was comparing—

Ryan Isaac: Yeah, this is at the peak.

Reese Harper: At the peak of the markets, he said that one bulb could be traded for “the amount of money to feed, clothe, and house a whole Dutch family for half a lifetime, or sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash—” That is kind of like your neighborhood.

Ryan Isaac: Yeah. Similar.

Reese Harper: “Complete with a coach house, and an 80-foot garden. And this, in a time when homes in that city were as expensive as property anywhere in the world.” So, that was the conversion rate of a tulip bulb.

Ryan Isaac: A diseased one that actually wouldn’t grow for very long.

Reese Harper: The house that none of us will really be able to ever afford. That is what you could get at the time.

Ryan Isaac: And the importance of that date was that was January of 1637. The funny thing is in February of 1637, the market was gone. So that same bulb, the next month, was now worth a tenth of that. Which is still probably pretty expensive.

Reese Harper: So you are saying the next month after this big peak, the whole market just fell apart.

Ryan Isaac: Yeah, and historians think it just finally got to a place where people were going, “okay, wait. A flower bulb for one of the most expensive estates on a river in Amsterdam? Probably not worth it.” And it just ended. So it was this huge run-up, and this big bubble of tulip craze, and then it just went away. Wealth was lost, people lost money, and bankruptcy, and…

Reese Harper: So really what happened is the demand just dropped. People decided at some point that tulip bulbs didn’t have a value, and that is what caused—

Ryan Isaac: Not a value of a house, anyway.
Reese Harper: Yeah. So today, the correlation between the story is a topic that came up at a presentation I did this week at a dental school where— I usually start out dental school presentations with “give me your top ten questions about money and finance.” Like, “what are the things that are on your mind?” And multiple people in the top ten asked, “how do I get into Bitcoin?” or “what is Bitcoin?” or “is Bitcoin good? Should I do Bitcoin?” Now, this is a demographic issue. Some of you who might be further along in your practice may have never really heard of bitcoin at all, or care what it is, but I think it is an important discussion to have. If you have heard about it, this will at least give you enough information to have an intelligent conversation with someone about Bitcoin, which I think is probably what most of you care about is not being in the dark about this subject. And then, this will also provide some context for investment advice, like, how do you look at something like Bitcoin as an investable asset? Because as Ryan and I were just calculating prior to this podcast, even since we started writing this episode ten days ago, in ten days, Bitcoin has gone up about 17%. In ten days (laughs).

Ryan Isaac: Which isn’t even the steepest run we have seen.

Reese Harper: No. Over the last year, in one year, it was trading for less than $1000 a coin, and right now, it is trading for $7,000—

Ryan Isaac: It is just under 7,200 bucks. As of a minute ago.

Reese Harper: Today’s date being… what is today’s date, Ryan?

Ryan Isaac: November 8th, 2017.

Justin Copier: 9th. November 9th.

Ryan Isaac: Oh yeah, you know how we know it is the 9th, by the way? It’s Q’s birthday.

Reese Harper: It is Q’s birthday. Happy birthday, Q!

Ryan Isaac: Happy birthday. We are going to make you worth longer today.

Reese Harper: Ryan bought you a Bitcoin for your birthday.

Ryan Isaac: Yeah, a $7,200 birthday present.

Justin Copier: And you guys are going to teach me if I should hold on to it.

Reese Harper: Well, I would be a little cautious about the Bitcoin Ryan is going to give you. It’s a physical coin; it may or may not be authentic.

Ryan Isaac: It might have been written with a Sharpie (laughs).
Reese Harper: He may or may not have minted it himself in his basement.

Ryan Isaac: (laughs) one of those flat machines at the zoo that you put your penny in.

Reese Harper: Okay, we will get into these details, but we want to start with kind of just talking about Bitcoin and explaining what it is. We are going to talk about the process of creating it, a little bit about the pros and cons behind it, and famous people’s opinions about it. So it will be a really interesting episode.

Ryan Isaac: It will be a fun one to talk about. So, what is Bitcoin? The first thing to describe Bitcoin is it is a new class of currency that is referred to as cryptocurrency. It sounds so mysterious when you say cryptocurrency. And if you are cool, by the way, I think you just say crypto. Right? You don’t use currency.

Reese Harper: Mhmm. I know that is all I say.

Ryan Isaac: (laughs) crypto.

Reese Harper: It’s like last night, I was watching a tv episode where Sylvester Stallone came on and he said, “just call me Sly.”

Ryan Isaac: (laughs) what was that? What show?

Reese Harper: That is his nickname. On This is Us. He says his name is no longer Sylvester, it’s just Sly. And it made me think exactly of crypto. The difference is, he’s cool, and you know he’s like, “whatever, eighty?” (laughs)

Ryan Isaac: So if you are in a room full of people, or you are at a party at the golf course, and everyone is talking about Bitcoin, just be the guy who says crypto. Don’t say cryptocurrency. (laughs) so anyway, cryptocurrency— now, Bitcoin is not the only cryptocurrency out there right now. Bitcoin is actually split into several different channels of the original. They call it “forking” when they kind of fork off into a different direction. It’s funny, because as of this week, there was one of these channels, these split offs from Bitcoin that was supposed to launch, and they were just like, “yeah, nevermind. We’re not gonna do it.” But people had bought it.

Reese Harper: You mean, there are different cryptocurrencies that kind of have deviated from Bitcoin, and they are trying to create their own little market.

Ryan Isaac: Yeah. Some from Bitcoin, and then there are other ones that are totally independent of Bitcoin. There are tons of them. I mean, as of this year… I wrote this down… there were almost like 1,100 different cryptocurrencies in the world. Now, Bitcoin is the biggest. It has the most… I don’t know, popularity, or momentum, or value… it costs the most. It’s the most expensive cryptocurrency right now.
Reese Harper: A lot of people think it is just virtual or online money, right? But it is a lot different than that.

Ryan Isaac: Yeah, well that is where the term “crypto” comes from. The term “cryptocurrency” actually describes less about it being a new coin or a new currency and more about the process, which we will talk about later. But the crypto part comes from the word “cryptography,” which literally means “the art of writing or solving codes.” So actually, cryptocurrency has more to do with the system, or kind of like the online ledger that tracks and records and validates all the transactions than it does just that it is a new coin. So, that is where the crypto comes from.

Reese Harper: So, you just gave us some really deep detail there.

Ryan Isaac: Yeah, we’ll jump into that in a little bit.

Reese Harper: So, what you are saying is that it is basically a currency. Bitcoin is, that you can take your money and you can convert your money into a different currency, which is Bitcoin, or you can find Bitcoin; you can discover it. Some people call it “mining.”

Ryan Isaac: We’ll get to that, yeah. But I guess the point is, the reason why it is called cryptocurrency is because the system that it runs on, that is actually kind of the more fascinating part for me, and a lot of people think this. And it is actually being implemented, this system; we’ll talk about it later.

Reese Harper: So it is technology that is actually pretty advanced.

Ryan Isaac: Yeah, it is really really cool, actually. So, you know, there are just two parts to this whole cryptocurrency thing. There is the currency itself, which is just online, digital currency that is picking up a little bit more popularity. I mean, you can buy stuff with it now… you can buy it, and sell it later, and see if you made any money or lost any money.

Reese Harper: Well it was started in 2009, right? By someone or a group of people, but we are not really sure?

Ryan Isaac: Yeah. Known as Satoshi Nakamoto.

Reese Harper: But that hasn’t really been officially validated.

Ryan Isaac: No. So in 2009, there was a person or a group of people— no one really knows for sure— called Satoshi Nakamoto. And this Satoshi person, or company, or whatever, published a paper that was called Bitcoin: A Peer-to-Peer Electronic Cash System. Which is kind of what we were talking about before: when this launched, it wasn’t just about, “here’s a new currency to buy stuff online,” you know? It was, “here’s a new system for tracking things.” Which we’ll talk about a little bit. So, it was in 2009. The goal of this was basically to form a decentralized system with no regulating force. Like today, you know, our currency has a centralized system that is a regulating force—

Reese Harper: There is a federal reserve that controls the currency, and the government makes rules around it.

Ryan Isaac: And they are printed, and they are stamped, and we know when they exchange hands. Every transaction goes through a bank, or through currency, I mean, it’s traceable. It can be traced back to people and organizations. So, one of the goals was that every person can now make monetary transactions that were completely anonymous without having a centralized system that was regulating all this stuff.

Reese Harper: Yeah, and I’ve read that even though it is anonymous— and I’ve seen this in a ledger system— that is the interesting thing about Bitcoin is you can see everyone else’s transactions.

Ryan Isaac: Yeah, live. In real time. It’s kind of cool.

Reese Harper: So you know who is spending money. You just don’t know who the person is, but all the coins are linked to an account number, and you do know if that account number is spending money. There is some anonymity because there is no name with the account, but you do know that this account number is spending a lot of money or has done this transaction.

Ryan Isaac: Yeah, you can go to the website.

Reese Harper: It is fairly transparent in that regard.

Ryan Isaac: Yeah, it is. It is totally transparent. Some people describe the whole system like a locker that has glass sides that you can see what is sitting in there, and what is going in and out of this locker, but you can’t actually get in there, and you don’t know who it is assigned to.

Reese Harper: Yeah, you don’t know whose locker it is.

Ryan Isaac: Yeah. So anyway, it starts in 2009. In 2010, it was worth one penny, you know? It was worth nothing. And it was kind of like the currency that criminals used (laughs) early on. I mean, that is really who adopted it.

Reese Harper: There was some sketchy stuff that happened.

Ryan Isaac: Some sketchy characters! I actually finished this book about this online basically illegal drug store called the Silk Road that was started by this guy named Ross Ulbricht, this kid out of Texas. He ended up getting busted by the feds a few years ago. It was the biggest worldwide anonymous website to buy drugs, guns, order hitmen, human trafficking… it was pretty awful. But one of the only reasons— he almost shut it down until Bitcoin got invented, and he was like, “oh, that’s how I’m gonna do it.” And so, one of the big early adopters of Bitcoin or all these currencies, it was just illegal activity. But I mean, that is the description is what it is; that is why it was invented.

Reese Harper: So, you’re just saying, in this example, Ross had set up this company to do some pretty shady stuff, but rather than launching it— because if he launched it, then it would be traced to him some way. But when Bitcoin was invented, he was like, “I could use Bitcoin to protect my anonymity.” But that is kind of what also gave Bitcoin a bad name initially, right?

Ryan Isaac: Yeah, and that is one of the big stories. So, the Silk Road, I think it was busted in 2013, and a lot of people worried that that would be the end of cryptocurrency, you know, Bitcoin and all the other ones. Because that is what it was used for at the time, you know? We’ll talk about places you can use it today.

Reese Harper: It has definitely advanced more now.

Ryan Isaac: Well yeah, it’s a lot different. I think if you are going to recap— again. If you are going to be at the golf course or party and you’re talking about your cryptos, you just want to know that it was an online system for anonymous, decentralized payments that would replace our current monetary system, our dollars, you know?

Reese Harper: Just think of it like, when you travel to Switzerland, you have to take your U.S. Dollars and you have to switch them for Swiss Francs in order to buy stuff there. Bitcoin is more like another currency in another country; it is just that it is starting to be adopted more globally. In fact, Japan recognizes it as an actual currency, don’t they?

Ryan Isaac: I don’t know that. That would be a new fact to me. You saw that?

Reese Harper: Yeah, I have seen that in a Wall Street Journal article. Like, it is being recognized by— I don’t know if any other governments have, but I believe Japan actually recognized in now as an actual currency that they accept in regulation. And so, it is starting to make a lot more inroads than it did, and the reason people like it is because of that anonymity, and that obviously poses a lot of questions about how governments are going to want to regulate this, and what it is going to lead to… there are just a lot of questions, and we will get to what famous people, like famous economists and financial minds are saying about this kind of closer to the end.

Ryan Isaac: So, to summarize, when you are having discussions about Bitcoin and cryptocurrency, I guess the thing to know is, Bitcoin is one of many types of online anonymous currencies, there are over a thousand that exist now, and the word itself “cryptocurrency” means two things: the currency part is obviously the monetary spending value, like Bitcoin, and the crypto part of cryptocurrency just refers to the system that tracks and keeps a ledger of all the transactions.

Reese Harper: Yeah. And if you are hearing people talk about how they get it, I think it is probably a simple way, but we are going to go into some detail here. Just a big overview. If you are like, “this is all I want to know,” just know that everything Ryan said is kind of a great summary of Bitcoin. The process of how it came about and how it is created is you basically have a bunch of smart people, or dumb people, I guess, with smart computers— you have people with computers that are solving problems, complex math problems, and those complex math problems end up being awarded with coins. And so, if you solve a complex math problem with your computer, you can get awarded a coin. So literally, there are people all over the country and all over the world right now who have massive supercomputer systems, or as small as a simple system in their apartment, and they are just trying to continue to be awarded with these coins, and there are a limited number of coins that can be discovered. Right now I think there are about 12,000,000 coins that have been “mined,” and there are about 21,000,000 that have been allotted that can be found. So they are trying to mimic the idea of physical gold, that there is a limited amount of resources, and that is why the value of it can keep climbing. Because eventually, all of the coins will be in circulation and will have been mined, and so that is what can allow it to increase in price. There are a lot of pros and cons to this, and a lot of them have similarities to other speculative— we’ll call it other investments that might be speculative such as currencies or commodities that might have limited value. And so, that is kind of a general overview, and I think— let’s just talk a little bit, Ryan, about how people actually get Bitcoin in a little bit more detail. My explanation was a really simple one, but let’s talk about a few other ways beyond just mining it that they might be able to acquire it.

Ryan Isaac: Well, you can go buy it directly. So they have these online… they are basically like currency exchanges for cryptocurrencies—

Reese Harper: Sometimes they call them online wallets, right?

Ryan Isaac: Wallets, yeah. So you can go directly to— one of them is called Coinbase. That is one of the big ones.

Reese Harper: Yeah, if you go to bitcoin.org, they will have a big old list of all the wallets.

Ryan Isaac: And it will just allow you, literally you can go and grab $7,200 out of your bank account and buy one single online coin!

Reese Harper: Through a wallet. It is kind of like a PayPal, or a Venmo that deal only with dollars. I wonder if PayPal or Venmo will ever start allowing Bitcoin to be used.

Ryan Isaac: Yeah. It is so interesting, man. So, if you go on to one of these online wallets, you can buy it, or they can store it for you. The more interesting part about buying Bitcoin directly is that there are a lot of different ways you can store it. So you can go online, and you can buy a Bitcoin, but then you can choose— because there is nothing physical, right? It is actually just passcodes.
Reese Harper: You get a unique number that is assigned to your coin, right?

Ryan Isaac: Yeah. And so, you can download that stuff and put it on to— I think they call it hard wallets? It is basically just a thumb drive; it is an encrypted thumb drive. You can actually write it down on a piece of paper; some people do that, and they will put it in a safety deposit box.

Reese Harper: As long as you have your number, or you have the physical code that you need to be able to activate your coin—

Ryan Isaac: It is like a key.

Reese Harper: It’s like a key to be able to use your coin at any number of vendors. Or, to put it back into a wallet, right? One thing to note, too, before we move on to the pros and cons, is you don’t have to buy a full coin. There are a lot of ways to buy partial coins, half coins, quarter coins, I mean… there are a lot of different ways to acquire it physically. The pros of acquiring Bitcoin directly are, you know, maybe there are very little fees because you are purchasing it for the cost on the exchange, there are no taxes, right, for—

Ryan Isaac: That is another big concern the government has is like, “hey, how do we tax this stuff?”

Reese Harper: Yeah, so if you get paid for a good or service, I mean, there is no tax right now. You can trade it directly, person to person, instead of through an exchange. It is not regulated, so that is a pro for people who are trying to stay away from any kind of regulation. And it is totally anonymous, except for the fact that your account number can be seen by somebody else. And so… what about the cons?

Ryan Isaac: The cons are interesting, though. I mean, one of them is that they money sitting in your bank account today is FDIC insured, you know? The cash in your bank account, if something happened to the bank… I mean, that is insured up to certain amounts. There are no— the downside to the anonymity and the lack of regulation is that there is no protection if something happens. So theft of Bitcoin is really common. I mean, it is a huge thing for hackers to steal Bitcoin, and there is nothing—

Reese Harper: Yeah, the U.S. Government doesn’t regulate or recognize it as a currency. While, I think I did mention, Japan does at this point. It is a really volatile currency, right? Like I said, it was less than a year ago, it was trading at less than $1,000, and now it is at 7,100 and change…

Ryan Isaac: Like, if it dropped five grand today, that would not be surprising. It’s like, “eh. Bitcoin dropped $5,000 today.”

Reese Harper: Well, that might be surprising. It is possible, but you would definitely have people freaking out (laughs). But yeah, it is very volatile, and it moves a lot. Like Ryan said, in the last ten days, it is 17% increase, and we have seen just a significant— the last year, though, has been nothing but up. And it has been a bull market for a year. So, it will be interesting to see how much volatility there might be in the future.

Ryan Isaac: So, some of these cons of storing it, I mean, there are a lot of stories of theft. And right now, it is common— you have heard of like malware and viruses on your computer; you have heard of ransomware, where someone gets in your computer and holds in ransom. That is really common now, where you will get some malware or a virus in the computer and they will scan for Bitcoin holdings. And they can see how much it is; they don’t even have to know how to get into it. What is happening is hackers are holding computers ransom, they see that there are Bitcoin holdings, and then they just rob people. And there is no recourse. It’s not like someone steals from your dental practice and then you can prosecute or sue them. There is like no recourse for it.

Reese Harper: One of the big things that people talk about is that there is no underlying economic value, so it is not like an asset that produces anything. In that sense, it is similar to gold or any other currency; it is just a medium for exchange. And it doesn’t have the underlying economic value that makes it go up like a stock might, or a contract, or someone promising to repay you, like a bond. Those have underlying economic value, where this doesn’t produce anything.

Ryan Isaac: Warren Buffett talks about that; we’ll talk about that in a little bit. But that is kind of the, how do I buy Bitcoin directly, and those are the pros and the cons.

Reese Harper: Tell me a little bit about a story that I heard about with this— it was like Mt. Gox or something that you mentioned that I thought was interesting, where someone got like a massive amount of money stolen from them.

Ryan Isaac: Yeah, so Mt. Gox— this was a few years ago— that was one of the first big online wallets where you could go directly by it and have them hold your Bitcoin. There were 800,000 Bitcoin at this Mt. Gox online wallet, and it just disappeared one day (laughs). It just disappeared, and the CEO made a statement— everyone was really mad, and he was charged with embezzlement, but they couldn’t do anything, and so nothing really ever happened, but he basically made a statement and was like, “yeah, guys. There was a security flaw, so, I’m really sorry. A bummer to everybody.” It was 800,000 Bitcoin, which, at the time, it was like almost a billion dollars. In today’s dollars, it would be six billion dollars. I mean, that is like a tenth of Bernie Madoff, you know? But it just disappeared over night. People had gone, and they had bought their Bitcoin securely with this online wallet, and then one day… I mean, basically, everyone thinks— I mean, we are not going to accuse anyone here, but everyone thinks that the owners just stole all the Bitcoin (laughs).

Reese Harper: You did a lot research on this, and one fun story that you found that I liked was the guy that threw away his Bitcoin in the trash can? What happened?

Ryan Isaac: Oh, really fun, yeah. A guy named James Howells, he had 7,500 coins on a secure— this was with a hard wallet, a thumb drive. It wasn’t worth very much when he had them. He had mined these himself, so he had found them on the internet by having a computer solve these complex equations and then was rewarded 7,500, had them on a thumb drive, forgot about it, cleaned out his house, and chucked it. The value of that today, it be like 56 million dollars that he just threw away on a thumb drive.

Reese Harper: Oh man, that’s kind of a bummer around Christmas time.

Ryan Isaac: (laughs) like, “sorry, kids. I almost had 56,000,000.” There are stories like this all over the place, because people are keeping them on thumb drives, they are getting stolen out of laptops, online wallets are not secure in the way that a bank would be secure, you know?

Reese Harper: You mentioned that the guy who started the Silk Road, he was eventually shut down, but then something interesting happened with the FBI agents that ended up ransacking his place.

Ryan Isaac: Yeah, it was crazy! Well, it was actually a guy here in Utah. In a small town in Central Utah, the FBI raided his place. He was one of the main distributors on the Silk Road for, I think it was cocaine. So they raided his house, and when they had him in handcuffs, two FBI agents sat on his computer— because one of the big things when they were busting the Silk Road is they were trying to get anyone who was logged in as an admin or as a distributor and to like catch the while their computer was logged in. Because a lot of these guys had like one button, and it would kill the computer. So they catch him, he’s still logged in… they’re going through the house, it is a busy crime scene, and one agent sits at the computer, and he steals like a quarter million Bitcoin out of this Silk Road bank account. And at that time, it was fluctuating so much. Like, this Ross guy who started it, I mean, he would make like $100,000,000 overnight, because Bitcoin just increased, and then he would lose it the next day. So this FBI agent stole like a quarter million Bitcoin, and it didn’t matter. At first when they saw that it had left their bank account, they were like, “it’s Bitcoin. It’s nothing. It’s worthless.” Who cares that Silk Road lost a quarter million Bitcoin, you know? It wasn’t like a billion U.S. Dollars mooched from somewhere. They eventually caught him, like four or five years later—

Reese Harper: The FBI agent?

Ryan Isaac: The FBI agent. There were two of them; they are service prison time.

Reese Harper: So, an FBI agent stole money from the thief (laughs) while he was trying to regulate it.

Ryan Isaac: But the point is that no one cared at all that Bitcoin was stolen. It was like, “whatever,” you know? And so, they let it roll.

Reese Harper: So how else can I invest in Bitcoin if I don’t want to buy it and hold it directly? Can I do it any other way?
Ryan Isaac: Yeah, there are a couple ways. There are a couple funds— maybe you want to talk about this for a minute— that are tracking… it is like an ETF that is tracking Bitcoin.

Reese Harper: They purchase and acquire it in a trust, and so, these ETFs, you will be able to buy into directly. Just go online and search for an ETF for Bitcoin. Right now, I think there are only really two main ones: GPTC and BTSC. Those are two ETFs; I don’t recommend investing in them.

Ryan Isaac: This is not investment advice.

Reese Harper: That was not investment advice; you need to consult your own advisor.

Ryan Isaac: (laughs)

Reese Harper: But as opposed to owning it directly, it is a different level of sophistication where there is another layer of protection that eliminates you from some of these theft issues. It does allow some professional level of management, so some people might prefer that. But, you know, some of the hardcore miners out there, they are not going to like to go and own that through an ETF. The whole point of Bitcoin was to avoid regulation, and to create anonymity, and—

Ryan Isaac: Yeah, and now you’re signing up with the SEC, and (laughs)— to own my Bitcoin, I need an ETF?

Reese Harper: It just kind of defeats the purpose for a lot of the kind of purists. And then, people have probably called me ten times in the last month to buy it, and I say that you can play at your own risk in your own sandbox with your own computer, and have a good time, but my personal opinion is that this is— I wouldn’t give advice around something like this any differently than I would give advice around any currency trading or any commodity purchase. To me, this is more speculation than it is an investment. And so, if you want to bet on the Super Bowl, I’m not going to get in your way, and if you want to buy some Bitcoin, I’m not going to get in your way. But it is not an investment. But anyway, let’s talk a little bit about how people could mine Bitcoins. How can they discover them, and how do they find them?

Ryan Isaac: Yeah, this is the rabbit hole, though; this is fascinating. So this is the “crypto” side of cryptocurrency. When you hear mining— so you were describing it earlier as computers. Now they have to be really really fast, complex, and just energy-sucking computers that are solving really complex math problems and being awarded Bitcoin, up to 21,000,000. So, the best way to think about this is like, right now, if I were to send you— let’s say I have my Venmo app, right, and I just venmoed you twenty bucks. Venmo kind of helps the transaction along, but it is recorded at the bank, right? It leaves my bank; it goes into your bank; there are centralized systems. The whole point of cryptocurrency is to get rid of centralized systems, so it is not one bank recording transactions. The way cryptocurrencies work is, think of an online ledger, and instead of one central organization keeping every transaction and updating—

Reese Harper: Okay, people listening to this may not know what a ledger is.

Ryan Isaac: A ledger. Um, think of like the old checkbook days, you know?

Reese Harper: So think of it as a check register. Your old check register.

Ryan Isaac: A check register! If you remember checks.

Reese Harper: And then the new kids who are listening, they are like, “I don’t know what either of those things are.”

Ryan Isaac: “I think my parents had checks.” Right, but you would write down a debit or a credit, if you had a deposit or you paid someone, and then update the balance. Well the same thing is happening in cryptocurrencies, but instead of one central system that is recording it, it is literally thousands and thousands of people or computers that do it.

Reese Harper: And everyone on everyone’s computer has access to see every transaction.

Ryan Isaac: Yeah. So, all of these thousands of computers, every ten minutes, there is a new block of transactions that happen, and these computers verify the transactions, they encrypt everything that has happened—

Reese Harper: And encrypting means they put a code around it and wrap it up—

Ryan Isaac: They take all the data, it is called a hash, and it is this long thing, and then they add it to the chain of previous transactions. That is why they call it a blockchain. There are blocks of transactions that are linked in one huge chain that are encrypted with this code. And for a computer to add the next block, which kind of keeps the ledger up to date, it has to solve a really complex algorithm with—it is literally going through billions of iterations. That is why the computers have to be so powerful. It is going through billions of iterations to find this key that encrypts the next block and adds it to the chain. And when they do that, they get awarded in Bitcoin; that is how new Bitcoins come into the marketplace; that is what they call mining Bitcoins.

Reese Harper: So, you love this stuff, and are clearly interested.

Ryan Isaac: It’s great! It was a rabbit hole of YouTube videos and articles. It was really cool!

Reese Harper: You can also say, people with really powerful computers solve math problems and get coins.

Ryan Isaac: And get coins. That is exactly what happens. What is crazy, though, is that just a few years ago, you used to be able to do this on a laptop. Now, the code self-regulates. So, as computers got faster at it, because the code make sure that these blocks only get added every ten minutes. Like clockwork. And so, as the computers have gotten faster, the code gets more complex. More complicated. So now, instead of a guy on a laptop in an apartment, you have people in China with warehouses and ten-foot walls full of supercomputers that are being cooled with like hundreds of air conditioners. They are spending like a million dollars a month in utility bills to try to crack these codes. It’s crazy.

Reese Harper: So basically, the more people who get involved and the more people who are trying to solve these math problems, then the harder it is to find the coins.

Ryan Isaac: Yeah. The code self-adjusts.

Reese Harper: It makes it more complicated. And if people stopped looking for new coins, and they were like, “ehh, we got bored,” or quit working on it, then the code would get easier and easier too.

Ryan Isaac: Yeah, it would self-regulate to get easier.

Reese Harper: Because it wants people to find all the coins.

Ryan Isaac: And it needs the transactions to be recorded and put in the ledger about every ten minutes; that is in the code. So, what is interesting about this, the reason why I guess it is important to know how this works is that is one of the huge questions around the value of Bitcoin, because the reward for setting up these computers and running these systems and trying to add to the ledger, it is a self-regulating system, and the whole incentive for all these individual people to keep the ledger up to date and accurate is they get more Bitcoin. And so, the big question about the value and the future of Bitcoin is, what happens when there is no more Bitcoin to be rewarded for keeping the ledger up to date?

Reese Harper: That is a huge red flag for a lot of the professionals, because they are like, “where is the incentive?”

Ryan Isaac: “How is everyone going to get paid?” And they say, “maybe people will get paid in fees, and the fees will have to get—” but that is one of the perks about an anonymous cryptocurrency is that there are no fees involved. People aren’t taking huge cuts of transactions like a bank would.

Reese Harper: There is no intermediary, yeah.

Ryan Isaac: And that was the whole point, so… that is one of the big questions that remains.

Reese Harper: Well, we talked about how crazy the returns have been on this, and I think I want to just talk really quickly before we wrap up about what some famous people think about it. One of the more outspoken people around Bitcoin is Jamie Dimon; he is the CEO of Chase. He talks about—he is kind of bothered that he has been labeled as the anti-Bitcoin guy. Like, he has been pretty outspoken against it, because—like the first time, one of his quotes was, “if you are stupid enough to buy it, you’ll pay the price of it one day.” So that kind of got a lot of press. And he doesn’t want to be viewed as this old-school, stodgy person who hates technology—

Ryan Isaac: He kind of has a slight bias to not want banks to, you know, have to be competed with by a decentralized, unregulated currency (laughs).

Reese Harper: So there is a little bias, and it is at the heart of his argument. But at the same token, he makes a lot of good points. I heard him do an interview, and the main overlying philosophy that he has is that governments don’t like things to happen with money that they can’t track, trace, or control. And if you can’t track, trace, or control it, then eventually, governments will shut it down. And he is just saying that right now, the FBI and the CIA and the Federal Reserve and the U.S. Government, they just don’t know how to shut it down, or how to regulate it. They don’t know what they are going to do. And right now, as of this year, where Bitcoin’s market value has really kind of skyrocketed (in the last twelve months, we have gone from less than $1,000 a coin to north of 7,000) now we are probably going to see some kind of response from—in the near future is my guess. I think governments can’t be silent about something like this indefinitely. And that is Jamie Dimon’s point; that is why he says that if you’re dumb enough to buy it, you’ll pay the price for it one day. Because as philosophically admirable as it might be to create this decentralized system and create a deregulated currency and have it be anonymous… I mean, all of these things are interesting and exciting, you know? But at the end of the day, there is a reality to this, and that is that if a government decides that they don’t like it, then the thing is worthless. And so, that is the kind of risk you are playing right now.

Ryan Isaac: What I think is interesting—this is my thought as I have gotten more into this. The “crypto” side of cryptocurrency—this is what Jamie Dimon was saying too, he was saying, “I don’t really care about Bitcoin itself as a currency.” You know, you just expressed his thoughts. But he said, “but the blockchain is a technology that is a good technology.” He said, “we actually use it. It is useful for a lot of things.” He said, “God bless the blockchain.” The blockchain technology that we were describing, that kind of ledger system, it is used by Walmart now in tracking produce. From farm, to hitting the shelves, to know the quality of produce. There are diamond companies using the blockchain technology to track and verify and authenticate where the diamonds came from, you know, from the mine to sitting on the shelves, to authenticate quality. So, I thought that was interesting, too. He was like, “I don’t care about the currency, but the technology is phenomenal and has a lot of future implications.”

Reese Harper: Yeah. And as with most things that get invented for the first or second time, they are not all bad. And sometimes, there are good things that come out of creations that don’t always end up being sustainable or useful over the long run in a lot of different ways. But my personal opinion about this subject is probably the one I just want to make sure is clear. And I think Warren Buffett said something that I resonate with. He said, “you can’t value Bitcoin because it is not a value-producing asset. It’s a real bubble in that sort of thing, and it doesn’t make sense. This thing is not regulated. It is not under control. It is not under the supervision of any federal reserve system or any other central bank. I don’t believe in this whole thing at all. I think it is going to implode.”

Ryan Isaac: The oracle has spoken.

Reese Harper: He said it. I’m not saying that it is not here to say in some form, but it is going to have to go through a lot of iterations, and there is some volatility around it, and I think speculating on this is not different from speculating on any other outcome of any other random-occuring event, because there is just so much unknown. I mean, in theory, all of it seems to have a lot of good underpinnings. It is easy to just kind of throw Bitcoin under the bus as some random thing, but the more you research it, and the more you look into it, you will see that it is actually very sophisticated, and it is not going to go away overnight, even if a government says, “we don’t like it. We’re gonna start regulating it.” Regulating this is going to be very hard.

Ryan Isaac: Well it is against the whole nature of the entire system.

Reese Harper: And there is so much anonymity behind everything that all they are going to be able to do is they are going to be able to set really punitive penalties in place if you are dealing in it, and then a lot of people still aren’t going to— they are still going to hide it, and it is still going to be floating around for quite some time. It is going to be difficult to unwind. But do you really want to be putting your money towards something that has that much uncertainty around it, and it is not a value-producing asset, and there is that much controversy around it? So when people are calling me and they are asking me about this thing and if they should do it, one of my first discussions is kind of the same discussion I like to have around taxes, okay? A lot of people want to find a loophole to not have to pay taxes, and they use a tax law that has been written, and they say, “this is how I’m gonna interpret it, and this is how I’m gonna get around it.” And I say, “well what was the point of the law? Like, what was the point of the initial intent of the legislation? Why did they write this in?” I think sometimes if you look at the point of currency, you get the point of why a society has a currency that is traceable.

Ryan Isaac: Or why they regulate it, yeah.

Reese Harper: That is traceable to an individual, and that is regulated. Why would they do that? I think it is pretty simple, and it is that if you can accumulate wealth in an anonymous way, and you can transact in an anonymous way, then it allows the worst part of all of us to come out, kind of at the forefront of our personality. You were telling me earlier today how on social media or on the internet—

Ryan Isaac: That is why we are awful online. It’s why normally kind, normal human beings turn into monstrous, mean people online. There is a level of protection there.

Reese Harper: Yeah, because they don’t have any accountability. There is a level of protection; you don’t really know me. And especially if they are anonymous, I mean, people just go off the rails!

Ryan Isaac: Just go to YouTube and read some comments (laughs). The dregs of society.

Reese Harper: Yeah! You see that happening with black markets; they have grown as a product of this currency more than they ever could have through a regulated currency, even like cash. Cash, at some level, has limitations to it. I’m not saying everything about this has been bad, I’m just saying, I don’t really like the idea that deregulation and decentralization of currency— the assumption a lot of millenials are making is that it is just way better for society. Like, if we get the government out of our money and lower the fees of trading money through an intermediary like a bank—

Ryan Isaac: Which, technology will solve that problem; technology will drive fees down from banking, and it already has.

Reese Harper: It has! From any financial intermediary, it has driven fees down like crazy. But I don’t like the idea that an anonymous currency source is somehow going to be safer for society. Imagine a United States where every transaction happening around you, no one knows who is paying for anything. You don’t know how to trace money anywhere. Imagine how that would affect incentives. Like, how tricky it would be to know who is making your prescription drugs. Who is giving you medical advice. Which forces are creating that advice. Who is educating our kids. Who is educating our advisors. Who is educating our professional community. Who is educating our consultants. Who is funding all of this. You know? The reason currencies are regulated isn’t because governments want to control you, it is because if people don’t have accountability to how they spend their money, then it allows the darkest parts of our personalities to come out. And I’m not saying I’m immune to that. I’m just saying, if there is no accountability to how you spend your money and no one knows about it—

Ryan Isaac: You’ll be buying like, illegal imported pizzas from Columbia that you’re not supposed to have.

Reese Harper: I’m just saying… it can get wild (laughs). Anyway…

Ryan Isaac: Well I mean, that is one of the ways that governments are able to stop terrorism is to cut off money supply, because they can see the flow of big amounts being transferred to and from different places, and they can stop terrorism because of money supply. And that is a big concern. And that happened with a lot of the black market stuff where illegal weapons and hits on people, you know, and bigger terrorist acts can be executed because of the anonymous nature of paying for it.

Reese Harper: Yeah, and that affects my investment philosophy, personally. I mean, I put my money in places that aren’t always the highest return, but sometimes they reflect my values; sometimes they reflect what I want to see happen in our economy; sometimes I invest in a company or a person or something that I believe in that I think has underlying economic value. And I guess the whole genesis behind Bitcoin is a philosophy that people don’t realize a lot of times with they are investing in it that they are supporting something that they potentially may not want to see grow and thrive (laughs). The outcome of supporting it and investing in it may result in an outcome that you wouldn’t want to see anyway. So, if you want to invest in things that are speculative, that’s fine. I mean, betting on the outcome of the Super Bowl is one thing, but supporting a deregulation of currency also involves— there are a lot of implications there.

Ryan Isaac: I think that is the opinion we want to make clear is, people are still going to speculate in this. The message we would tell clients is, at least admit what is happening here. It is not an investment into something that has an expected return that is producing an economic value; you’re not investing into something like that. That was Warren Buffett’s point. Just admit that you’re speculating and you’re gambling, okay? So, if it goes well, you can be honest about why it went well, you know? It was a lucky guess in something that was highly speculative. If it goes poorly, then you could say, “I gambled,” you know? And make that distinction. There is a guy named Josh Brown, he is known as Downtown Josh Brown of the Reformed Broker; he is an investment advisor in New York. Anyway, he was talking about Bitcoin and he said, “so I’m not sure that the thing gets tamed so much as turned into yet another mainstream trading vehicle that people at all levels of experience and sophistication will use to act like children.” (laughs) he says, “my guess is that the initial impact will be bullish, but like everyone else, I’m just making this up as I go along.”

Reese Harper: (laughs) yeah. I think that is what we would like everyone to take away is that all of us are kind of making this up as we go along, and we don’t really know what is going to happen with it.

Ryan Isaac: We will update this Bitcoin episode in like three years and tell you what happens.

Justin Copier: Or three days.

Reese Harper: Three days, and we’ll get back to you. But, I do like how he says that it may not be likely that this gets tamed, right? Or really turned off. And that is what I was trying to say earlier; it is going to be a slow process to sort of reign this thing in. It is just too sophisticated to just shut off overnight, and so it will just be interesting to see how many people act like children with this (laughs), versus how many people actually— I like that he said that it is going to be turned into a mainstream vehicle that people use to trade and speculate around.

Ryan Isaac: And act like children (laughs). Yeah.

Reese Harper: We’re seeing that right now! It didn’t take long for the public markets to create products to capitalize on it.

Ryan Isaac: And in that same article that that quote came from that he is talking about, I think it is the Chicago Exchange that is trying to create some kind of futures investments around the future price of it, so… acting like children and making it up as we go along. That is basically the takeaway from Bitcoin today.

Reese Harper: Thanks, Ryan.

Ryan Isaac: Okay. We invite everyone to watch our channel on YouTube; we have the Dentist Money™ Show that is now streaming on YouTube, which is really exciting. And to schedule your free consultation with us, you can go to dentistadvisors.com. There is link at the top of the page with a little calendar; you can pick a time that works for you. We will talk about your situation, and answer any questions that you have, and we would love to hear from you. And as always, you can just give us a call directly at our number which is 833-DDSPLAN, and thanks everyone for joining us again!

Reese Harper: Thanks Ryan. Carry on!

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