Gavin Andresen – Bitcoin vs. the Dollar – interview – Goldstein on Gelt – Oct 2013

Naomi – click here and write a clever title Transcription of interview with Gavin Andresen
on October 14, 2103. Douglas Goldstein, CFP®, Financial Planner
& Investment Advisor Gavin Andersen is the chief scientist of the
Bitcoin Foundation. Douglas Goldstein, financial planner & investment
advisor, interviewed Bitcoin on Arutz Sheva Radio. Douglas Goldstein: What is the Bitcoin Foundation
and what are bitcoins? Gavin Andersen: Bitcoint is a cash for the
internet. It’s a new kind of money that is designed to work really well on the internet
and the Bitcoin Foundation is a nonprofit that was formed last year to take this open
source software technology and basically help to make it a success. Douglas Goldstein: You’re referring to only
the internet so it doesn’t exist in real life? Gavin Andersen: It is a creature of the internet.
It’s a digital currency so although there have been enterprising people who have created
kind of physical manifestations of bitcoin, really those are more kind of a novelty item
and it’s really designed to be an online payment system and an online currency. Douglas Goldstein: How they work? How does
someone get a bitcoin? Gavin Andersen: Typically, people get bitcoins
by either buying them from somebody else using some other currency or earning them in any
other way that you earn money. The thing that makes bitcoin really different from other
currencies is that there is no central bank and central issuer that creates the bitcoins.
There is this really odd kind of third way you can get bitcoins which is you can try
to make them yourself so people all over the world are what are called bitcoin miners,
they invest in some specialized hardware and they run their computers 24 hours a day and
they used lots of electricity and they are actually the people who validate the bitcoin
transactions to make sure that they are all valid transactions and for that work they
are rewarded with new bitcoins. That’s how new bitcoins come into bin. At first, it seems a ridiculous system but
the software is carefully designed so that only a limited number of bitcoins are produced
no matter how many people turned on their computers. So there’s an algorithm running
that adjust itself so the more people who are trying to create bitcoins, the harder
it becomes to create them so that the same number of bitcoins is created overtime and
there’s an ultimate limit to the number of bitcoins being created because the system
is designed so that they created more slowly overtime. Right now, we are producing 25 bitcoins
on average every 10 minutes and that number will actually go down. There are around 12
or 13 million bitcoins exist right now if I recall that right. Douglas Goldstein: Why couldn’t someone
who is a bitcoin miner just by himself to more computers and make more bitcoins? Gavin Andersen: You can buy yourself more
computers and try to get a larger share of the number of bitcoins that are created but
the network is designed so that it adjust itself so that the more people trying to create
them, the harder it becomes so that the supply is always predictable and limited. Douglas Goldstein: For any one person he could
for example make himself more wealthy in terms of bitcoins in his wallet? Gavin Andersen: People do that but it’s
kind of like trying to become the only person producing anything else that is in demand.
Cornering the market on a spaghetti sauce, spaghetti sauce manufacturers are competing
in to everybody else who is producing spaghetti sauce and bitcoin mining is kind of similar.
You’re competing to everybody else who is trying to generate bitcoins and then the demand
for bitcoins really decides the price of bitcoins and that indirect way affects how much people
are willing to spend on new computers and electricity to produce new bitcoins. These days you
need a specialized hardware so people actually
have created special hardware that’s only good at creating bitcoins and you do expend
electricity performing these calculations that both validate the transactions that are
going across the network and also do what’s called the proof of work function. The proof
of work function is what keeps that bitcoins supply limited. Today, I believe the number
is 180 million times harder to create a bitcoin than when the bitcoin network started four
and a half years ago. That gives you a sense of how far we have scaled up since bitcoin
started and it’s that increased in how hard it is to create a bitcoin that keeps the supply
strictly limited so that we will never have more than 21 million bitcoins in the world.
That’s the limit [inaudible 0:06:15] to the system. Douglas Goldstein: When you got this going,
why did you feel the world needed a new currency? Gavin Andersen: Two things really make bitcoin
interesting for me. The first thing that makes it interesting is it’s just more efficient
than the payment system we have today. I don’t know if any of your listeners have ever tried
to send money overseas, they might have been stunned to find out how much their bank will
charge just to move a few electrons over a wire to change a balance in one bank account
on one side of the ocean to another bank account on the other side of the ocean. Bitcoin is
really designed to be a lot more efficient than the legacy banking system so the payment
network where the fees are much lower and it’s really designed in the internet age.
All of the payment systems were using today were designed in the age of moving physical
checks around for example. It’s just more efficient system. The other thing that make a lot of people
really interested in bitcoins is the economic model of there is a limited supply of bitcoin
so it’s more like a gold-based system. I know a lot of people who understand gold as
a good store value because there’s a limited supply of it and governments cannot decide
to inflate it really willy-nilly, have become very interested in bitcoin as kind of the
digital equivalent. Bitcoin has that same property, there’s a limited supply of them,
everybody knows what that supply is and what that supply is going to be. Theoretically,
that will make it more stable long term. Practically, that hasn’t been true because it’s kind
of just baby startup currency and the price has been incredibly volatile but that’s
the theory. Douglas Goldstein: You said there is the concept
of saving in fees and a limited supply. In terms of fees, we have seen other upstarts
and some of them are successful on the internet to help lower fees for example Paypal, transfer
money to someone tends to be a pretty low price transaction and of course they are there
to guarantee the transaction. Gavin Andersen: It depends on what you consider
a low price. Paypal charges merchants. Generally, customers don’t see the charges, it’s
the merchants who pay and so in all of us who are paying indirectly in the form of higher
prices. Bitcoin is pretty easy to sell for merchants although there are certainly a huge
of chicken and egg problem of you know merchants who would love to use bitcoin because the
fees are much lower than Paypal or credit cards or these other systems, but they are
not that excited to use it because another customers aren’t using it yet because it’s
a brand new thing. There’s a certainly huge chicken and egg problem there, but theoretically
in the future, the incentives are designed so that bitcoin will remain a very low cost
way of sending money anywhere in the world and the notion of being able to send money
anywhere in the world is also kind of pretty new. It’s just easy to send a bitcoin to
your next door neighbor as it is to somebody in Africa, America or Australia which is where
it happened
to be at the moment. For most people, right now, there’s not
a super compelling use case for bitcoin. Your credit card and bank account probably works
really well for you right now and there’s really not a whole lot of reason for you to
start using bitcoin so that’s one of the problems that a lot of entrepreneurs all over
the world are trying to find the places where bitcoin really does make sense and to start
there. People are talking a lot about remittances which is people working overseas and sending
money back home. A lot of people and I actually think that that’s a market that costs people
a lot of money who can’t really afford it and really bitcoin could be a really great
solution for that. Douglas Goldstein: Let’s talk about the
second point you raised which is the ultimate limited supply of 21 million bitcoins. Won’t
that ultimately then cause the value of each bitcoin to go up as more and more people need
it. Gavin Andersen: We’ve seen that already.
When I first heard about bitcoin, I didn’t create bitcoin. I heard about it I think a
year and a few months after it had already been started but when I first heard it, bitcoin
costs less than a US penny a piece and today as we said, they are trading for over $100
a piece. Because there’s a fixed supply and because the longer bitcoin is around,
the more people start to use it for things and the more desirable it becomes to have
them and that does drive the price up. The 21 million I should say is a little bit misleading
because bitcoins are very divisible. Typically dollars that can divide into pennies that
is as far as you can go. Bitcoins are divisible down to 8 decimal places so one bitcoin can
be divided up into 100 million little pieces. People who expect bitcoin to continue to be
successful expect will be talking in terms of prices and fractions of a bitcoin instead
of whole bit coins, hopefully in the future. Douglas Goldstein: General exchange is really
managed by the bitcoin foundation. Who is paying for all that? Who is paying their salary
and all the other people who are involved? Gavin Andersen: Bitcoin is a creature of the
internet so it is an open source software project. It was created by Satoshi Nakamoto
who pretty sure Satoshi is not his or her real name. Probably for ideological reasons
just based on Satoshi’s writings and then kind of given away for free for the world
so it’s open source, anybody can contribute to the project. For the first couple of years
that I was working on a project, I was doing it purely out of interest. I just found it
to be a really interesting fascinating project to work on and so I helped work on it and
help make it go for free. The first several years of bitcoin’s life, it was running
exactly that way, just people volunteering their time, maybe a little bit of money to
help out with any small costs that are associated. The network itself is run by everybody who
decides to download and run the software so unlike traditional payment networks where
there are some huge data center processing all the transactions, it’s completely decentralized
system where anybody running the software is doing all of that work. So it’s all kind
of volunteers, it’s all kind of enlightened self-interest of people who believe in bitcoin
and want to make it work that contribute their time. Now that change last year with the formation
of the Bitcoin Foundation which is bunch of businesses, individuals we got together and
decided having a central organization makes sense, just to do things like talk to government
regulators or talk to reporters or organize a conference. Probably the world’s most
successful open source software project is the Linux project I would say for open source
software. Wikipedia is probably the world’s most successful open source website but we
model ourselves on the Linux Foundation. I am being paid a salary from the Bitcoin Foundation
through the donations of people who want to be members of that association so that’s
a nonprofit organization and part of what it does it that it does pay my salary in bitcoin
on the 1st of every month. Douglas Goldstein: How can people follow your
work? Gavin Andersen: You can follow me on Twitter
@gavinandersen or checkout is the main webpage. Douglas Goldstein, CFP®, is the director
of Profile Investment Services and the host of the Goldstein on Gelt radio show (Monday
nights at 7:00 PM on He is a licensed financial professional both
in the U.S. and Israel. Securities offered through Portfolio Resources Group, Inc., Member
FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member
NYSE/SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available
in bookstores, on the web, or can be ordered at: (02) 624-2788
or (03) 524-0942. Disclaimer: This document is a transcription
and/or an educational article. While it is believed to be current and accurate, divergence
from the original is to be expected. The original podcast can be heard at
All information on this website is purely information and should not be used as the
sole basis for making financial decisions. The opinions rendered herein are those of
the guests, and not necessarily those of Douglas Goldstein, Profile Investment Services, Ltd.,
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