FTX, Fraud, and the Case for Cryptocurrency in 2023

Mindy:
Welcome to the BiggerPockets Money Podcast where we interview Laura Shin and talk about cryptocurrency. Hello, hello, hello, my name is Mindy Jensen and with me as always is my coinless co-host, Scott Trench.

Scott:
I may be coinless, but I’ve never lost my keys. You’ll get that by the end of this episode, I promise.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where or what you’re investing in.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or understand why people invest or purchase cryptocurrencies, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, I am super excited to talk to Laura Shin today. She is a wealth of information about crypto. I started off the episode not quite a fan of crypto. I know that’s not a surprise to anybody who has listened to this show before. But I am looking forward to learning more about it.

Scott:
Yeah, absolutely. Laura’s a wealth of knowledge. We had a wonderful conversation. And among other takeaways, I just want to leave you with this. I’m convinced after talking with Laura that crypto is worth at least playing around in, 10, 20, 30, 40, 50 bucks to understand. And I hope you walk away with that takeaway today too.

Mindy:
I hate to admit when I’m wrong. I really, really hate to admit when I’m wrong. I am going to agree with you, Scott. With the caveat, don’t put anything in that you are not willing to lose 100%. Play around with it in very small amounts. Don’t put $10,000 in if you can’t afford to lose all 10,000 of those dollars.

Scott:
But before we bring in Laura, we are going to give you a quick overview of cryptocurrencies, what they’re about, where they come from, and I think you’re going to love it.

Kailyn:
Everyone has heard of cryptocurrency by now. You see ads trying to sell you crypto. You have finance experts talking about cryptocurrency as an increasingly normalized alternative to regular money. Crypto is here and it’s here to stay. Some of us know quite a lot about crypto, but lots of people are still very new to the idea of cryptocurrency. Many of us still really don’t know what it is or even how it came about, and that can make it an intimidating subject. When you look at the history of crypto, how it was invented and why, it becomes a lot clearer what the intention was behind this form of digital payment and why it became so popular.
The invention of cryptocurrency is widely attributed to an American cryptographer called David Chaum who had an idea in the early 1980s about creating electronic money that will be totally anonymous, that’ll be controlled entirely by the user and it would be untraceable and unconnected to any central bank or centralized government system. So from the very outset, the idea of cryptocurrency was much more than a digital currency or having money that physically isn’t there. It was much more about trying to create a whole system that will be controlled by the users or consumers and that will be independent from traditional banking systems.
Now, this is where the most important core value of crypto came about. It came from Chaum’s conference paper back in 1983 in when he talked about something called DigiCash, which is a proto cryptocurrency that he developed. The idea behind it was that you used a computer system or computer software so you could get your money out of the bank. Now, this would require encryption or an individualized key that would be sent to the recipient only. So only the person withdrawing money had access to their transaction, not the bank. So the early idea of crypto still involved banks, but the idea behind it was already that you controlled your own money and you controlled the access, nobody else.
Now, fast forward to the 1990s to the dawn of the internet era. And as someone called Nick Szabo, this guy developed something called bit gold. Bit gold is the most direct precursor to Bitcoin, which is the most widely used form of cryptocurrency we have today. The idea behind bit gold was that you had to connect your computer and commit the power of your computer to solving mathematical puzzles. Essentially, the puzzle solving generated the power required for getting the reward for coin. So this is where the idea of mining comes into play, and this is essentially how computers mining for Bitcoin function today. The more powerful the computer, the better it is at solving problems, and the better it is a generating or mining the coin or reward.
The only thing that Szabo couldn’t do was that he couldn’t figure out how to get this process going without involving banks or central authorities. So this is something known as the double spending problem. And it wasn’t solved actually until about a decade later by someone called, well, we should say by someone who called themselves Satoshi Nakamoto. He wrote a paper called a Peer-to-Peer Electronic Cash System, and that was the beginning of the blockchain. Essentially what Nakamoto invented was the blockchain technology behind Bitcoin. In the very simplest form, blockchain technology is a structure for data that cannot be changed once it is put into place. So what Nakamoto did was he took a headline from the Times that was actually about the financial crash of 2008, which of course was one of the most important events of the 20th century. The story was about the bank bailouts and the crash of the financial system in the Western world, and that was the founding block in this chain of encrypted data that built Bitcoin.
This first block was actually what helped mine the first 50 Bitcoins, and it’s what started the whole process of computer solving problems and generating the information, the data that is then encrypted into Bitcoin. The first 50 Bitcoins weren’t valued or traded in any way on the stock market. However, Bitcoin eventually did go on the stock market and by 2010, 1 Bitcoin was valued at 14 cents, and then later that year, by the fall, it crept up in valued to 36 cents, and then by the end of 2010, it dipped to 29 cents. And this is how Bitcoin started to take off. And you can’t underestimate the power the media played in the ascent of Bitcoin. Forbes published an article about crypto in 2011, and that article made the price of Bitcoin skyrocket, and we actually saw the price rise from just under $1 to almost $9 by the end of May, 2011. So we’re talking about unprecedented growth here.
However, the value of crypto in the market has fluctuated considerably throughout its relatively short history. In the early 2010s, we were seeing the rise of Bitcoin contenders, like Litecoin start to crop up. Some people call them Altcoins, some of them just branched off from Bitcoin. Others were based on different codes or different blockchains. But Bitcoins still continue to lead the market in cryptocurrency and was doing very well by 2012. And that was a year that something called The Bitcoin Foundation was created. The Bitcoin Foundation was specifically created to promote Bitcoin and to make it available to wider audiences. There were also projects such as Opencoin, again, aimed at making Bitcoin more accessible and making it better understood and generating more interest in cryptocurrency. The passage of crypto has never been smooth and it’s never been consistent. There’ve always been legal issues, federal criminal investigations and ways of looking into the legality of Bitcoin as a system.
So throughout the 2010s, you were looking at Bitcoin values plummeting and then rising again, and then plummeting and then rising again, sometimes in a single day. The famous Bitcoin crash on November 19th, 2013 saw the price of Bitcoin go from $750 down to $400 in a single day. And that was normal at that time, and what Bitcoin users expected from the currency and, honestly, still do to a large extent. The 2010 decade eventually brought vast improvements in both the security of Bitcoin and its availability. Something called the Lightning Network was developed in order to make Bitcoin more secure. By December, 2017, Bitcoin was trading for $20,000, and this is right at the same time when the main competitor of Bitcoin was ascending. That was Ethereum, and it quickly became the runner up to Bitcoin.
Ethereum is known for being much more inclusive than Bitcoin. Bitcoin is very much a closed network, while Ethereum opened itself up to other platforms for trading and using its blockchain from the get-go, which was appealing to many people. Today in the 2020s, we are again seeing a pattern of fluctuating value in cryptocurrency. Every time Bitcoin undergoes financial regulation, prices drop or the value drops, and then with each new innovation, the value rises again. What gave Bitcoin a much need to boost was the fact that Tesla bought $1.5 billion worth of it in 2021, which allowed the value to go up again to nearly $70,000. Crypto has seen other headwinds such as the debacle with FTX and so on. Crypto will continue to be a volatile currency, a volatile financial system, and it’s not for the faint of heart. At the same time, you know it will crash and then it will rise again, and then it will crash, and then it will rise again. And that’s just the nature of the beast. The future of crypto is unpredictable, but there almost certainly is a future.

Mindy:
All right, huge thanks to our esteemed producer, Kailyn Bennett for sharing that with us. Before we bring in Laura Shin, let’s take a quick break.
And we’re back. Laura Shin is a crypto journalist, host of the Unchained Podcast and author of The Cryptopians: Idealism, Greed, Lies and the Making of the First Big Cryptocurrency Craze. She’s also the first mainstream journalist to cover crypto full-time, and her podcast and videos have had 20 million downloads and views. So it’s safe to say that Laura knows a little bit about crypto. Laura, welcome to the BiggerPockets Money podcast. I’m super excited to talk to you because I don’t know anything about crypto.

Laura:
Yeah, I’m excited to be here. And also, it’s 25 million now.

Mindy:
Oh, 25 million. Oh, I’m sorry. Even better. Yay. So it sounds like there’s a lot of people who are interested in crypto itself. Our audience is mainly real estate investors. Can you give us a very brief description of what crypto is and how many different crypto options there are?

Laura:
So crypto is a sort of nickname now for what people generally call cryptocurrencies, but more precisely should be called crypto assets. And some of the currencies would be a subset of the wider crypto assets. And when I say that the broader term is crypto assets, there are some cryptos or crypto assets that function more like, for instance, you could say digital oil rather than digital money or digital cash. So many of them are structured in different ways. It’s sort of similar to how we have many different other investments in the world from stocks to commodities to bonds, et cetera. So within crypto assets, you can have different types of financial vehicles or instruments that are all structured with this certain technology or formed with this certain technology.

Scott:
So walk us through the investment thesis. Why do people invest in cryptocurrencies in a general sense and how do they choose specific ones?

Laura:
So crypto got started with a whitepaper in October of 2008, and it was the Bitcoin whitepaper, and the subtitle of it was A Peer-to-Peer Electronic Cash System. And what was unique about Bitcoin at that time was that it was yet another attempt at digital money, this had been attempted before, and yet this time it was, quote-unquote, “decentralized.” Meaning that it wasn’t controlled by any central actor. Now, previous attempts at digital currency had some entity that had centralized control over this digital money, and so they could, for instance, be shut down by a government. But with Bitcoin, because there was no company or CEO or any kind of set of executives or anybody, there was nobody to say, “You are the ones in charge. We’re going to shut this down, we’re going to put you away.” Whatever. And the reason that Bitcoin can exist and yet still be decentralized is because Bitcoin, the asset, the currency has incentives built into it.
So for instance, let’s say that you had a digital currency that was created by a company. They would need to hire, for instance, an IT department or something to make sure that the system didn’t get hacked. Now, Bitcoin, like I said, there’s no executive, no board, they’re not hiring people. However, the Bitcoin software is designed so that every 10 minutes, there’s essentially this competition where people, if they contribute computing power to the Bitcoin network, they are entered into this competition to win new bitcoins that are minted by the software on average every 10 minutes. So early on when Bitcoin was kind of worth nothing, people especially at that time it was mainly I would say cypherpunks, which were this group that had been interested in creating this kind of money that was not controlled by a government and also libertarians who are also interested in that kind of thing.
They were really the ones who very early on saw a lot of value in this. So oftentimes they were the ones that they were hooking up their computers, running the software that, like I said, was creating new bitcoins every 10 minutes. They were the ones winning those coins and they thought, “This is going to be valuable someday.” Little did you know anybody realize just quite how valuable it would become. But the point is that to them, they are trying to win these coins, but to Bitcoin the network, Bitcoin, the blockchain, it’s getting security. And when I say security, what I mean is if you want to take over Bitcoin, if you want to, I don’t know, make some counterfeit transactions or something, if you want to change the ledger, then you have to get more than 50% of the power in the network. They call this a 51% attack.
The one thing is even if you get 51% or more of the power, you’re limited in what you can do. You can probably do maybe some small-ish number of counterfeit transactions. You could maybe change very recent history, but anything that’s a bit older would be super, super, super, super hard. But anyway, point is that when people hook their computers up to the network to try to win coins, they are making it harder to attack Bitcoin. So that’s how they’re sort of replacing this IT department. And like I said, it’s through the incentives built into the coin.

Mindy:
Doesn’t decentralization kind of lend a hand with things like the FTX crash and other things like that?

Laura:
No, no, no. FTX is completely centralized. It’s an exchange with a company and a CEO and a board… Well, it didn’t have a board. That was one of the issues. But it’s totally centralized. Another aspect of a lot of these decentralized networks is that the ledger is completely open and public, so everybody can see all the transactions. With FTX obviously was a company, so everything was closed source, it was private to them. So that’s how they were able to keep this hidden. And apparently, at least from what has been known so far, only four executives knew. I’ve even talked to some of the high level executives, they had no clue, it was being held as a secret.
So when things are decentralized… So let me just explain how a blockchain works and then you can understand how it is that decentralized things force everything to be public. Well, not always. If you use really, really, really fancy cryptography, you can make them private and also a blockchain, but it’s very few of those right now. So I’ll just explain how a basic blockchain works. So let’s say that you and I are all part of a village and it’s just, I don’t know, like 100 people. Our financial system would be that every day at noon we would get together in the town square and we would all call out all the financial transactions we had in the last 24 hours. So I could say like, “Oh, I paid Mindy five bucks for a loaf of bread yesterday.” And Scott would say, “I paid Laura 10 bucks to give me a ride to the airport.” Or something. And everybody would have ledgers and we would all write down all of the transactions that are being called out.
Now the thing is, none of our specific ledgers is the ledger that’s in control or the one that’s the one everybody will look to you as being the main ledger. We all agree that no one person has the right ledger and that instead the correct ledger is the one that’s sort of in the cloud that the majority of all the ledgers agree upon. So if I’m sick one day and I’m missing a bunch of transactions, then as long as the majority set all agree on something, then everybody in the village knows that’s the correct ledger, whatever the majority of the ledgers say. So that’s essentially a blockchain except instead of the villagers you just swap those people out for these anonymous computers all around the globe. And when I say that we would call it the transactions once every 24 hours, in Bitcoin it happens on average every 10 minutes. That’s called a new block of the blockchain, a new block of these transactions, like you’re batching all the transactions and adding them to the ledger all at once.
In Ethereum that happens every 12 seconds roughly. And in other blockchains it can be even faster. But that’s essentially what a blockchain is. It’s a chain of these blocks of transactions or batches of transactions. The way we can all check the ledger is because it’s public, there’s these websites called block explorers and you can go onto, for instance, like a Bitcoin block explorer and you can see all the transactions on Bitcoin since Bitcoin got launched in January, 2009, same with the Ethereum blockchain, Etherscan is one of the most popular block explorers, and it has all the transactions since it launched in the summer of 2015. So essentially that’s a blockchain, and that’s why, at least especially for the early ones, everything is public and visible and open. And also, everything’s open source because anybody in the world can contribute to the code base. It’s just like a community project is how you can think of it. So even the code is open to people, unlike how with a company they would generally have their code base private.

Scott:
We recently talked to Saifedean Ammous, who is a big Bitcoin proponent. He has some nasty sentiments around other coins. I think the term he professionally uses is (beep) coins. And one of his thesis for Bitcoin, it’s kind of like digital gold. It’s a very hard currency. There’s a clear finite amount of it. It’s very hard to produce, it’s very secure. All this computing power goes into securing the blockchain for it. You mentioned earlier this concept of you need 51% of the nodes in the blockchain, the computing power essentially, to change the code.

Laura:
No, not to change the code, but to attack the network, to try to change the ledger.

Scott:
Okay, thank you. Yes. So we’re obviously amateurs trying to become journeymen in this. His thesis is that the blockchain is really single purpose and that it’s only potential use case then is for the winning currency, which, in his opinion, will be Bitcoin. Can you walk us through why you may or may not agree with that, and why the blockchain may have applications for other coins that may not have the same computing power and therefore are vulnerable to a 51% takeover?

Laura:
Yeah, so Saifedean is the author of The Bitcoin Standard. All of his content is about Bitcoin, and I think he would style himself as an Austrian economist. So he’s definitely coming at it from that kind of libertarian angle. And as a journalist, I don’t really have any particular coins that I… I look at the facts, and I’m not trying to root for anything one way or another. But in my reporting, I would say that there’s two main groups now in the crypto community, which are maybe the money crypto people and then the tech crypto people. And Saifedean is definitely a money crypto person, and many of the money crypto people are Bitcoin proponents. So he’s really looking at cryptocurrencies and crypto assets through that lens of this non-governmental money. How could that be used? How could that basically maybe take away government’s power or whatever, why is this better than gold? Et cetera.
The tech crypto people say, “Hey, Bitcoin’s awesome, and Bitcoin was the first application whatsoever of any blockchain.” And it’s sort of like email was the first big thing on the internet. And they think Bitcoin’s hugely important. And yet they’re also saying, “Oh, there’s actually a lot of other things you can do with the technology as well. You can make lots of things decentralized.” And many of them are trying to take products and services that would typically be offered by a centralized company on the internet, sort of what we’ve seen the last 20 some years of the dotcom revolution where when people want to offer something online, they form a startup and maybe they get some seed funding, then venture A round, venture B round, blah, blah, blah, whatever, maybe they go public. But with these other crypto assets, what they’re saying is, “Hey, maybe we can offer these products and services in a decentralized fashion.”
So what I’m going to do is, this is going to be a slightly long answer, but I’m going to just explain what Ethereum is so people can kind of understand. Because Ethereum is the second largest crypto network and it is very distinct and different from Bitcoin, and it’s actually what’s enabled a lot of these other decentralized applications. So it’s important to understand that base layer that all these other things rest upon. So the creator of Ethereum is Vitalik Buterin, and he, at the time he conceived of Ethereum, was a Bitcoiner. He was actually a Bitcoin journalist traveling around the world and writing about it and meeting different Bitcoin communities. And he noticed that a lot of people were trying to innovate on Bitcoin by, for instance, launching a new blockchain that tweaked some of the aspects of Bitcoin and maybe added some new features.
And he thought, “Well, if we’re doing it that way, then whenever people launch a new chain that has features that weren’t available on the old chain, then suddenly the old ones will be obsolete.” And he thought, “Why can’t it be more like an app store where people can dream up whatever they want and have it be a decentralized application?” So similar to how our current app stores have things like cooking apps and photo apps and finance apps, there’s so many different kinds of apps, right? Productivity apps. And so his thought was there should be an app store, but for decentralized applications so they can be decentralized like Bitcoin. So he thought, “Okay, there should be a blockchain then that instead of having all these different features is boiled down to a programming language and then people can program decentralized applications on there.”

Scott:
How do I boil down the essence of the thesis of someone who is really into Ethereum or another cryptocurrency? What do they believe fundamentally is the long-term value of these currencies?

Laura:
Well, I could probably talk about Ethereum. So for instance, we would call Saifedean a Bitcoin maxi, meaning it’s a short term for Bitcoin maximalist, and there are Eth maxis out there. So these are people who believe that Ether will be kind of the coin. Then, by the way, I personally think that actually if not the majority, then some huge, at least plurality or maybe it’s equal parts across all three, some huge number of people just believe it’s going to be like our traditional financial world today where there’s many different assets and it’s not going to be literally just one thing. So anyway, okay, eth maxis. So let’s see. What they would say is that Ether has utility. I should explain actually why you, quote-unquote, “need” Ether to run Ethereum. Ethereum being this world computer requires that you pay some Ether for computation on the network. So if I’m just making a simple payment, if I send you an Ether, that doesn’t cost very much what they call gas, you can equate it to making a trip in your car. Just a simple payment it takes very little computation, so it’s like very little gas.
Now, if I’m going to do something more complicated like mint an NFT, that is a unique object, that takes kind of a lot of gas. So that’s like for instance, driving from New York to DC or something, I’m going to say. So it costs a lot more gas. And so that’s why people need Ether is because they need to pay for these different types of transactions. You can also use Ether to help secure the network. Ethereum is different from Bitcoin in that it’s not electricity that you add to the network to help secure it, you, quote-unquote, “stake your coins”, and that means you’re locking up your coins for some time period. And while they’re locked up, you can be entered into the regular contest to win new Ether that’s being minted. But the more coins you have, the more power you have in the network. So the number of coins is really what determines the security of Ethereum. They call that proof of stake.
So anyway, point is that Eth Maxis would say that Ethereum or Eth has utility. And so if you look at all the major trends in crypto ever since basically Ethereum’s launch, they all started on Ethereum. So for instance, the initial coin offering craze, which actually that’s the major subject of my book, it describes how we went from the launch of Ethereum in the summer of 2015 to about two and a half years later, this global phenomenon of crypto, which all happened with these initial coin offerings on Ethereum. So that was one right? During the ICO craze, the NFT thing started because… Well, first of all, actually the OG NFT collection called CryptoPunks launched in the same year, but then also there was this really popular game called CryptoKitties, and it was so popular that you couldn’t even use the blockchain. It was like the most traffic jammed blockchain ever.
So anyway, point is NFTs became a huge trend, also got started on Ethereum. There is another one called Decentralized Finance. So literally all these major trends, there’s another new one called Decentralized Autonomous Organizations or DAOs. All of these started on Ethereum. So Eth maxis would say, “Okay, Eth has utility.” And now just about two and a half months ago, Ethereum underwent a change in first of all how they switched from the electricity version of security in the network to this staked version. Then the other thing that happened is they changed the monetary policy. And with the new monetary policy, the more Ethereum gets used, the more deflationary the supply of Ether will be. So Bitcoin for the longest time, the Bitcoin proponents have said that because there’s a hard cap on the number of Bitcoins you can have, which is 21 million, we’re not there yet, but in about 120 years roughly, it’ll reach that cap. And the vast majority of coins already have been mined by the software or minted by the software. So it’s pretty much very close to the cap already.
Now, Ethereum maxis would say, “Oh, but now the more usage we see on Ethereum, the more coins get burned.” Meaning they get sent away to this place where they can never be retrieved. So that reduces the supply of Ether. And it is true that yes, since this event happened a few months ago, the supply of Ether has been more deflationary. So that’s why the Eth maxis would say, “From this point forward, since the supply will likely be on this more downward trajectory, that’s what makes Ethereum more deflationary. And therefore when you constrict supply, then the price goes up.”

Scott:
Awesome. So I’m not making a currency bet. I’m more thinking about Ethereum or Ether as literally like gas. There’s a finite supply on Earth, and it’s useful and it’s needed for this application, and therefore by investing in it or holding it, I’m going to see an increase in its real value over time.

Laura:
Yeah, yeah. It’s sort of a similar argument I would say to the dollar where yes, of course, obviously it’s the currency of the United States, which is the biggest market in the world… Or wait, shoot, I’m just realizing is it China or the US? Anyway, well at least has the biggest financial markets. But then on top of that, it’s the global reserve currency. So there’s demand for it even outside of the US. So there’s this clear utility, so that’s sort of maybe how Ethereum people think of it.
But one other thing I want to say is if you hang out with the Eth maxi crowd, you will hear them often be talking about ultra sound money. And the reason for this is that the Bitcoin community has long called Bitcoin sound money. And now because Ethereum changed its monetary policy to actually be deflationary, whereas like I said Bitcoins will be inflationary still for another about 120 years, even if it’s only slightly, now they’re saying, “Oh, well yeah, okay, Bitcoin is sound money, but Ether is ultra sound money.” And then they do emojis with a bat and then a little megaphone. So anyway, pretty funny.

Mindy:
Okay, so Laura, what is the current state of crypto? What coins are performing and which ones aren’t? And a side note, are there any indicators to watch out for it to help you determine which coins will perform or will not perform?

Laura:
So right now, crypto is in what we would call a crypto winter, which is when the market is way down from the previous all-time highs. So if you were to look roughly a year ago, I think it’s the end of November, 2021, Bitcoin reached a high of 69,000. I actually don’t know what it is literally this moment today, but I think the last time I checked it was roughly maybe like 18,000. So obviously that’s a massive decrease. And what’s significant about that is that it actually takes us below the all-time high from the last mania, which was at the end of December, 2017, 2018, which that hasn’t happened before, actually.
Every time there’s one of these manias, even after the bear market that will follow it often, the new low is still higher than the previous cycles high, if that makes sense. Hopefully this is not too confusing for people. But all I’m trying to say is the crypto industry is super, super down. The markets are way down. But I think what happens typically is during those crazes, a lot of get rich quick types come in, a lot of scammers, a lot of people who will just try to prey on newbies and steal their money. So when it’s this more kind of bear market and the prices are depressed, then you’re left with the true believers and the people who are actually trying to build something real.
So what I would probably say for 2023 is that because of all the different collapses that have happened this year, that we’re probably going to see a lot of regulation… Because it’s hard to get regulation passed in the US actually, I don’t know if I would say we’re necessarily going to see a lot of it passed, but we will see a lot of discussion about it and maybe some legislation passed here and there. But if there’s any piece of that legislation that threatens what the community perceives as important principles of decentralization or ways of maintaining that decentralization, then they’re going to fight tooth and nail over it. We’ve seen this time and again, where people will be like, “This legislation doesn’t make sense. It’s impossible to make things happen that way. You don’t understand the technology. Blah, blah, blah.” So I expect there will that we’ll see some of that.
In terms of figuring out which coins will do well, nobody knows the answer to that. I tweeted something like, “Because of all the challenges the crypto community has seen in the last six months or nine months or whatever, what lessons will you take from this year?” And somebody wrote, “Do not invest in anything you can’t explain.” Which personally, because I know this person, I don’t think that’s a lesson that they learned, but it’s a lesson where they already knew that and they’re just reminding everybody else that’s what you need to do. And that’s what I agree. So many people always say to me, “What should I buy? What should I invest in?” No, no, no, no, no. If you’re making your decision based on asking some other person what you should buy, then you don’t even know first of all why you’re buying second, you don’t know when to sell. You don’t really understand what you’re buying. You should be able to explain what you’re buying and why. You should be able to explain what’s valuable about it, why this is a good price for it, blah, blah, blah, et cetera. If you can’t do any of that, then you shouldn’t be owning it.
So what I often talk about is, and Scott asked me about this earlier, I can’t remember his question, but he might have framed it as investing in crypto. I often actually tell people you could also just say, “Hey, this is a new technology.” It’s sort of learning how to use email when the internet started or how to browse the web or whatever. So what you could do is you could just say, “Okay, I’m going to give myself a mini course. I’m going to put whatever, 50 bucks, a hundred bucks, even 10 bucks into crypto, and I’m going to then learn how to send a transaction. I will try to pay my friend or pay myself at a different location. Or I will try to buy an NFT, or I will try to create an NFT. I will try to vote in a DAO.” You can do borrowing and lending on these decentralized protocols, “I’ll try to participate in decentralized borrowing and lending. I’ll try to do a transaction on a decentralized exchange.”
There’s a lot of things you can try out and educate yourself that way because frankly, since these cryptocurrencies function like digital cash, and when I say cash, I mean literally if you lose it, you’re not going to get it back unless whoever took it from you sends it back to you. So you need to learn how to keep your coins secure. If you don’t know how to keep your coins secure, you definitely shouldn’t be, quote-unquote, investing in this. So you need to just learn, “How does this work? How can it be stolen from me? How can I lose it, et cetera? How do I keep it safe?” All of that.

Mindy:
I don’t want to interrupt you, but all of the stuff you’re saying, I’m like, “Yes, yes, yes, yes, yes.” This is exactly what I’m saying. I don’t understand crypto. I am on record multiple times as saying I don’t understand it. So I currently have $0 in crypto. I absolutely agree with you. If you can’t explain it to somebody, you shouldn’t be in there. And all these people who were taking out loans on their houses to go invest in crypto not knowing anything, I’m like, “Oh, that’s the worst thing. Why don’t you just throw that money out the window as you drive down the expressway?”

Laura:
I used to cover personal finance, so can you imagine sometimes when I’m covering this industry, I’m just like, “Oh my God.” Yeah.

Mindy:
It just breaks my heart.

Laura:
Let’s put it this way, the way I got into crypto was that I was covering personal finance, and frankly, I’m not going to lie, I was getting a little bit bored of it. And my editors threw me a bone and they said, “Oh, well we have this idea to do a Forbes FinTech 50 list. Do you want to head that up with another reporter?” And she and I divided it into categories, and I took the category of digital currencies and I just became obsessed. But the other thing was that for the other categories I had, because it’s the FinTech 50 list, I could see that these FinTech companies were basically putting a digital veneer on our decades old banking system, but that Bitcoin was an actual leapfrog in technology. It’s not using any of that at all. It’s just replacing all of that with something brand new and different, something never seen before in history. And that’s why I became super interested.
But like I said, because it’s something that hasn’t existed before in history, and because it represents money, you need to learn how to keep it secure. And this is why so many people have lost money, not because the value of their coins went down, but simply because it literally got stolen or fished from them, or they locked their money away and didn’t know how to access it again or whatever. You need to understand how to keep your money safe, your crypto safe.

Scott:
Let’s talk about that and specifically exchanges. Because it’s one thing to invest or own Bitcoin directly through the blockchain. You can also do it through intermediaries. These can be crypto exchanges, they can be investment platforms like Robinhood. Let’s walk through what’s going on there because it looks like, we don’t know exactly yet, but it looks like FTX and some of these other exchanges are susceptible to problems that our banking system with a dollar solved 100 years ago with bank runs, fraud and these other types of things. What’s going on with these exchanges and how does one protect themselves?

Laura:
So you will often hear in the crypto community, “Not your keys, not your coins.” And what that means is your keys are what are called your private keys. And every coin that you have will be at an address. And this public address is where people can essentially send money in. So you can receive money there, but then what sends the money out of that address is the private key. So this is why only you should have access over that. Or if you keep your money on an exchange, then they will manage your private keys for you. So this is kind of a controversial thing in crypto because there have been so many exchanges that have been hacked. Just imagine, it’s this massive honey pot for hackers. You can access tons and tons of what’s essentially digital cash if you manage to get into the systems of one of these exchanges.
So most famously, the exchange Mt. Gox got hacked for 850,000 Bitcoins, which I don’t know the exact number of that today, it’s in the billions for sure, many billions. And at the time it was like half a million dollars and that was in early 2014. So just to give you a sense of how much money that is. Now, there have been other hacks of exchanges, and like I said, what happens, so the Mt. Gox creditors they’re called, the customers who had money on the exchange, they still haven’t gotten any of their money back, and they’re probably going to get it in the next few months, and they’re only going to get cents on the dollar. And the reason is the way our laws are, this is being processed into Japanese court, but I think according to the Japanese laws or whatever, all the amounts that people get will be in fiat currency, not in crypto.
So if you had 10 bitcoins on the exchange, you’re not going to get… So let’s say the percentage that people are getting back is 10%. You’re not going to get one Bitcoin back, you will get whatever the dollar equivalent was from whatever, I don’t know, Bitcoin was probably worth a thousand bucks at that time or something. I don’t know. I may be wrong on the details, but the point is, you are getting dollars back, or fiat, you’re not getting your crypto back. So that’s like one bad thing. However, I don’t want to say… And so this is why because crypto people have been burned time and again with having their coins on exchanges, a lot of them will say, “Not your keys, not your coins.”
However, so what’s the alternative? The alternative is that you have to keep your own coins safe. And not a lot of people are really good at that. So you might have heard about the guy who he had a bunch of coins on a hard drive and he threw out the hard drive and it was hundreds of millions of dollars for the coins later when the price went up. So he actually is trying to get the town where he lives, and he might have even been able to convince him to do this to excavate some of the big landfills in the town. I don’t even remember all the details that he might have said, “I’ll give you some of the money or whatever.”
Then famously, there was a New York Times article that started with this one crypto executive who he, again, had hundreds of millions of dollars worth of I think it was Bitcoin on a device that it was supposed to be this very secure device and it was so secure, it only gave you 10 tries to guess the password. And if you did all 10 and you didn’t get in, you got locked out forever. And he had forgotten the password. He was on eight tries and he was like sweating bullets. And this was years ago when this came out. The funny thing is afterwards, so many people said to me, did you hear about that guy? And I was like this is not one person. There is 5 million people that have done… Or not 5 million probably whatever, some number in the thousands or maybe 1 million that have done a very similar thing. So many people have lost their coins because they’ve been trying to manage it themselves and they can’t do it.
So it makes it sound like there’s no solution. That’s not the case. It’s just the technology needs to mature. And I actually just did an interview on what we call our premium offering where people subscribe to get extra interviews with me, and this person that we featured, they have a wallet where you will manage your own private keys, but you don’t have to literally actually manage the keys yourself. It has kind of a biometric aspect. So the wallet will, whatever, see your eyes or I don’t know what the biometric aspect is. But then there’s probably some other piece of it, I can’t remember what that second factor is. But then the third factor is liveness, meaning like a hacker couldn’t just put up a photo of you to the phone or the device and open your wallet that way.
So anyway, point is people are building new products where it will make it so that you can’t so easily lose your own keys. So I have a feeling maybe people will flock to those because it just sounds like, “Oh, that solves the problem of losing your own keys.” So anyway, yes, this is why people are very wary of centralized exchanges. And then last piece I’ll say in this kind of brings us to the recent news. FTX obviously was the most recent example of people being burned by having trusted an exchange with their private keys.
This is very different from Mt. Gox. Mt. Gox was definitely incompetence. That CEO did not know that the exchange was being hacked and had been very slowly being drained of much of its Bitcoin for months. I don’t know how he didn’t know that, but if you read about him, you’ll read he was just sort of this guy with a cat and not much else. But anyway, point is FTX was very different. It’s kind of combined Bernie Madoff with Elizabeth Holmes type of situation. He’s been charged with eight counts of fraud by the DOJ, additional fraud counts by the SEC, more fraud by the CFTC. And then two of the other three executives who appear to have known about the fraud already pleaded guilty. And I can’t remember how many charges each of them had, but anyway, point is lots of fraud.
So again, what is it? There’s like more than a million creditors on FTX. So it’s a lot of people that are learning this lesson the hard way. But the point is that yeah, this has only given more momentum to people wanting to take control of their private keys. And we’re also seeing now that exchanges are trying to give their users confidence. So a number of them are doing what’s called proof of reserves, which is showing that the number of bitcoins that they hold in their wallets or addresses is the same as what’s owed to their customers. This is not a complete picture because they could have liabilities that we don’t know about that exceed that amount, and that would cut into what they can give to their customers. However, it at least is something. So I think it’s just giving kind of renewed momentum toward making sure that people can keep their coins safe.

Scott:
Well, this has been fascinating. We have a lot to learn. This about 45 minutes we spent with you answered some questions and opened up a ton more. I can see now how investing in cryptocurrency in any format really involves a philosophy and a practical understanding of how to do it, mechanically how to keep it safe that’s on par with investing in real estate. Laura, thank you so much for your time today. We really appreciate it and we’d love to continue the conversation at a future time.

Laura:
Yeah, thanks for having me. I really enjoyed this.

Mindy:
All right, Scott, that was Laura Shin from the Unchained podcast, The Cryptopians book. She was amazing. And honestly, she kind of changed my mind about crypto. I’m not jumping in with millions of dollars in crypto, but I’m going to go have a conversation with Carl about Ethereum and Bitcoin and maybe start looking at things. I don’t know that I’m going to go with that Dogecoin.

Scott:
Yeah, well, I think we learned a lot today, right? Look, we learned from Saifedean a week or two ago about the investment thesis behind Bitcoin and why there’s an argument to be made for a decentralized currency. We learned a little bit about the thesis for Ethereum and Ether and why a maxi there might argue that around utility. I think there’s lots more exploring to do to understand the investment thesis, the fundamental reason why you believe you’d want to invest in other cryptocurrencies.
Lastly, to invest in crypto is not just you go on Robinhood or your E*TRADE or whatever and purchase some crypto. Not your keys, not your coins. And there are problems that have arisen, especially with some of these newer exchanges that are not publicly traded US firms that have really resulted in huge losses. So I think it’s every bit as difficult to really understand and invest in mechanically as real estate investing, and you really got to have that philosophical thesis nailed and understand why you think that it’s going to rise. So I’d love to have a short discussion with you though, Mindy, on a couple of concepts around our philosophy with investing in crypto or not.

Mindy:
Okay, my philosophy has always been I don’t understand it, so I’m not going to do it. I think that is a well thought out philosophy. If you don’t understand something, you shouldn’t be investing in this. This goes all the way back to David Stein on episode 79 or something. I can’t remember what his episode number is right now. But he said the same thing. If you can’t explain what you’re investing in, you shouldn’t be investing in it.

Scott:
And so we talked about this a week or two ago. I think that’s perfect, right? I can’t help myself. I have to understand, I have to try to understand all of this stuff. And where I’m at is Bitcoin, I understand the Bitcoin maxi thesis, I think, at a fundamental level. And I can’t justify putting my money into Bitcoin and waiting for that thesis to transpire instead of investing in a hard tangible asset with utility. I don’t want to invest in a currency. I want to invest in something that is going to appreciate in value, that I can add value to, that can control, that can produce cash flow like real estate, like businesses, like the US economy in a general sense. Now that we’ve kind of unwrapped the thesis around Ethereum, I understand that as well, but I don’t really want to invest in a commodity, for example, or something that necessarily has that kind of utility that’s used as a currency. Again, same concept. I want to invest in something that can produce cash flow and that I can control and add value to. So that fundamentally still informs my thesis, and I’m waiting for the philosophical argument that is convincing for me about why a cryptocurrency should become a major part of my net worth, aside from a store of value as an alternative to the dollar.
Lastly, I want to point out one other thing that one of the things I think that’s attractive about crypto to a lot of people is the concept of the soundness of the money, the hardness of the money. And I think that the US Federal Reserve in the last year has shown that they’re going to do what it takes to restore faith in the US dollar and kill inflation. And I think that’s a killer or that’s a serious blow to some of the thesis around crypto. If the Federal Reserve is going to pound interest rates at the level that they did in 2022 and in 2023 come heck or high water, not going to say the other one, on this I think that that confidence in the US dollar, at least for the next few years, the next decade or so perhaps, we’re not going to see hyperinflation because we’re bent on defeating that. And I think that’s a blow to crypto and restores some faith in the dollar as returning to that lower inflation level. Well, should we get out of here, Mindy?

Mindy:
I believe it is time, Scott. That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying stay shiny.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/BiggerPocketsMoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench. It is produced by Kailyn Bennett. Research and writing by Anna Cochart. Additional research and writing by Kailyn Bennett. Editing by Exodus Media. Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.