Video - Wences Casares Explains Bitcoin

Xapos' Wences Casares gives one of the most comprehensive explanations at the Chicago Gold Ideas conference of why Bitcoin is the most important development in money in 5,000 years. He believes over the next 20 years it will replace the 5,000 year old gold standard, and though it won't replace national currencies it will become the digital currency protocol of the internet and may do for money what TCP/IP did for information. He explains the function of money, and the attributes and qualities of money, and the myths about money.


Thank you for giving me an opportunity to come to beautiful Chicago in this great venue. I'm going to try to explain Bitcoin very quickly in 15 minutes. It's quite a challenge but I think it is doable. In Spanish, we have a saying that goes something like when the genius points at the moon the fool looks at the finger and I find that that's quite appropriate with Bitcoin. You know now when someone finds Bitcoin for the first time, hears about Bitcoin for the first time we tend to focus on one of its many very, very interesting features. It may be that you are super interested in the cryptography of Bitcoin or it may be that you're very interested in the mining of Bitcoin or it may be that you're very interested in who is Satoshi Nakamoto, the mysterious creator of Bitcoin.

All of these features are incredibly attractive but in being so attractive we gravitate to them too quickly and we miss the bigger picture of why does Bitcoin matter. And that's what I want to talk about today. I think that Bitcoin matters because it may be the best form of money that we have ever seen. And it may not be very easy to notice that because it's early and Bitcoin may do for money what TCP/IP did for information. But it's very early we are like equivalent of 1992 for TCP/IP before there was a browser and it took a lot of imagination to understand how the internet may change the world. The first way I think to understand Bitcoin is to understand the history of money and the role of money. Anthropologists say that there is no evidence of any tribe much less a civilization that ever use barter for trade. And that should be quite counterintuitive to most of us because we are taught in school that we first bartered and then we invented money because bartering which was too hard.

Well, that's not true that never happened. From about 100,000 years ago to about 25,000 years ago the way we did trade was that everybody in our tribe would know that you killed a big Buffalo and I would come up to you and say hey, you're not going to eat that whole Buffalo can I have a little bit of meat and you would decide whether you want to give me some meat or not. And other members from the tribe would come and ask you for some meat and you would decide who do you give meat to and who you don't give meat to. And you have to remember who you gave meat to because you hope that they will pay you back somehow, sometime in the future. It's a very subjective system but that's how trade worked.

We all walked around with these subjective Ledger in our minds of who owes us what? And hopefully those people eventually repaid us and hopefully they repaid us in something that felt fair to us it was not going to be usually not in the same way we paid them. It's an incredibly subjective system but we use it for a very, very long time for 75,000 years at least longer than any other system. Until someone very intelligent in our tribe came up with a new technology and innovation that you know what? When she kind a have a little bit of your firewood everybody knows that you have a lot of fire and I said sure here is your firewood.

And this time this person said you know we're going to try a new technology, a new innovation here is some beads for you and I said no I don't need bead thank you and so no. This is not about what you want or need bead, we're going to use bead to keep track of our debt so we don't have to remember them subjectively anymore you just keep the bead and that will be how much you're owed. And it was such a successful technology that it just took off and very quickly in a couple of thousand years it's impossible to find some tribe or some civilization that doesn't have some form of ledger, objective ledger. Some tribes chose salt, some others chose rocks, seashell different forms of ways to keep track of debt in their society and their tribe.

Anthropology's go a sort of saying that if you describe to them the environment of a tribe, they can easily predict what's going to emerge as a ledger in that tribe because it's always something that the most important quality that object has is that it scarce. It makes sense because if something that we're going to use to keep track of debts if it's not scarce if we use three leaves I can simply pick leaves from a tree and create fake debts to benefit myself at the expense of everybody else. So scarcity is the most important attribute of these things to keep track of debt but also there are five other attributes that are very important, one that they are durable, that they don't decay or corrode etcetera that they be transportable, that they be divisible, recognizable and fungible.

This system took off and worked really, really well for about 25,000 years, for about 25,000 years ago to about 5000 years ago. And in 5000 years ago what happened is that tribes began to trade with other tribes and they needed something in common. We had beads you had seashells and we couldn't trade. And what happened then is that gold emerged as not the universal ledger for one tribe but the first Universal ledger. And it was gold because it was something that was universally scarce but it was also transportable, durable, divisible, recognizable and fungible. This very short a high-level history of money, I want to illustrate three myths that if you believe in any of these three myths is really, really hard to understand the proper function of money and why Bitcoin matters.

The first myth is that money was born out of barter when actually it was born out of a need to keep track of debt. And the second myth and perhaps the biggest myth is that money is backed by something and when actually money has never been and will never be backed by anything, it's just a ledger and people say well but the dollar used to be backed by something right now, it is not backed by anything but it used to be backed by gold. But in truth that implies that gold is backed by something or has some intrinsic value and the truth is gold does not have any intrinsic value beyond being a great ledger, beyond being very scarce. We use it for jewelry because it's very scarce because it represents wealth and power but not because it's pretty.

And this is a very common mission standing about money that it's just the ledgers not back by anything. And the final one is that money exists because it's created by government and because it's sponsored by government the truth is that money has been around for a lot longer than governments have been around and it will be around as long as there are social interactions around it fulfills a very basic social need. From where we are standing today is hard to understand the importance of gold because right now the universal ledger is not gold. It's the US dollar and before that for about 500 years we have had these reserve currencies first the Portuguese Escudo, then the Spanish, then the French, then the Dutch, then the British pound and now the dollar all of them have been the universal ledger.

They are serving currencies for about a hundred years but none of them have been anywhere near as good as keeping value as gold has. You know, if you had $100 and $1800 and you saved it as a hundred dollars it was quite a lot of money it may be more than a person's yearly income back then and today you would have just a hundred dollars. If you had put that in gold you would have the same value of roughly more than a person's yearly income today and we know of nothing else that is so good at keeping value other than gold. It's quite incredible that the best ledger we have ever found is such a primitive thing that takes billions of dollars to dig it out of the ground and then we lock it in vault on the ground again.

It is incredible that with all the technology that we have today that's the only one ledger that we can all use where we are not trusting a person we're not trusting a bank or a company or a government, we are just trusting that is something really scarce. The qualities that make gold such a great ledger is that it's so scarce but it's also divisible it's a portal it's durable it's recognizable and it's fungible. About 5 years ago at the beginning of 2009, Bitcoin was created it and it's a universal ledger that serves as digital money in a way in which you just like with gold you don't have to trust anyone. You're not trusting a single person, you're not trusting a company a bank or a government. And when you compare Bitcoin to gold it's incredibly superior in each one of this aspect not by a little bit but by a lot. And it's the first time in 5000 years that we have something that is immensely superior to gold.

The most important way in which it is a lot superior is that there will never be more than 21 million Bitcoins period, its mathematical perfect scarcity you can trust it. As with gold we mine more gold every year about 2000 tons a year. In terms of the divisibility each Bitcoin is composed of a million pieces called Bits. So a million Bits are one Bitcoin it's incredibly easy to divide. And the portability is also really important. Up until now and if I want to do a transaction with any of you with a dollar or a gold coin in this room it's very easy I can walk up to you and if I voluntarily want to give you a dollar you take it and the transactions done and we done a transaction between the two of us without any third party but the second we want to do a transaction with someone who's not in the room, we always need a third party.

And that has been the case forever you know we needed that's how banks got started a very long time ago but that's how we have today also on top of banks credit cards and things like PayPal etcetera. It's just impossible to do a transaction with someone else without both of us trusting a middleman. What's remarkable about Bitcoin is that it allows us to do a transaction with anyone else in the planet in real time and for free without any third party and without any added trust. We can do a transaction with someone you don't know anywhere in the planet in real time and for free. Think about that for a second we can call right now someone in Jakarta, Indonesia and put them in that big screen on Skype for free we can see them, we can hear them, they can hear us, they can see us and after we hung up we want to send them ¢1 which would be a lot easier because that would just happen is quite magic in terms of all the technology that had to be available for us to see them. When we want to send them ¢1 it's just not possible.

There are few ways there are for us to send ¢1 to someone in Indonesia will cost at least ¢15 it will take at least three days but more often it will take like $15 and more than a week to get there, it's just impossible to move that kind of money. With Bitcoin, you can move a cent or a million dollars and it just as quickly and just as cheaply. It's the first time in 5000 years that we have something immensely superior to the best form of money we had seen until now. The three functions of money when money works well it's a way of saving. It's a way of paying and it's a way of pricing. Right now, I happen to believe that these are the ways in which Bitcoin is going to develop. Most people who have Bitcoin today are using it as a way of saving.

They are not using it for payment so much because there's only about 7 million people who own Bitcoin. So there is not very many people you can transact with but most of those people are owning become because they believe in Bitcoin and they want to save in it. And I think the good thing about the saving function of a Bitcoin is that if you want to buy some Bitcoin you don't need to ask anybody's permission no one need to accept that you just buy some Bitcoin and hold them whereas for payment we need a lot of people to accept it. I think that once we have enough people who have Bitcoin for other reasons it will become a payment mechanism and naturally. But I think for now we are in the first few years staging which people are adopting Bitcoin mostly to save or as a curiosity. And once we have enough people that own Bitcoin it will become a payment mechanism naturally.

Then if it's use enough as a payment mechanism it's only natural that it becomes also a way to price things or a unit of account. Since launch, Bitcoin didn't have a lot of attraction from 2009 to about 2011 and it began to see some serious attraction in 2011, this chart is a little old.

Now there is about 7 million people who own Bitcoin there is between 20,000 and 100,000 people who are buying their first Bitcoin every day. Think, Bitcoin maybe the most important social experiment that is going on right now and I think it matters because there is a good chance that over the next 20 years we finally after 5000 years replace the trusty old gold standard for a completely new standard. The Bitcoin standard that one will not and should not ever replace any national currencies but it's likely to become the international currency of the internet. The native digital currency of the internet, the internet doesn't have today. And also, probably the biggest leap forward in the democratization of money and that's why I think it's worth paying attention what's going on with Bitcoin. Thank you very much.

Written by Melvin Draupnir on March 16, 2015.