10 Jul Paul Vigna: Bitcoin history lessons worth learning
Barry Ritholtz interviews veteran Wall Street Journal reporter and cryptocurrency book author Paul Vigna. We’ve got highlights of this excellent podcast.
Creation of bitcoin
Vigna highlights Satoshi Nakamoto’s release of the original bitcoin whitepaper at the height of the financial crisis in October 2008 and the trail to today and the growth of cryptocurrencies.
What Nakamoto was trying to do was replicate typical cash transactions according to Vigna:
“What the whitepaper was describing was a computer program. The goal of the computer program was to create this digital money, this peer-to-peer electronic version of cash.”
Nakamoto puts the software program online in January 2009, looking for collaborators to come on and work with him to develop the bitcoin code.
“This is a time where the existing financial infrastructure has shown that it’s just hopelessly conflicted, hopelessly corrupted and filled with problems,” he said. “People are interested in alternatives. The warts of the existing system have been shown and he comes up with an alternative when people take to it.”
The idea was to create a program that can support a digital currency that does not need a centralized party controlling it. No government, no bank, no central control. Just a self-sustaining decentralized operation.
A wildly disparate group of cypherpunks, anarchists, libertarians, programmers, coders, and others took to the idea. This small group tinkered with the code throughout 2009 and 2010 until a Florida programmer made the first purchase of a pizza using bitcoin, giving up about 200,000 early bitcoins to prove that the digital currency could be used to buy something.
Bitcoin moves to the Darknet
Around the same time, bitcoin in 2012 starts moving out of this smaller group of cypherpunks and filtering into the tech press in 2012. By July 2012, bitcoin reaches $10.
By 2013, bitcoin is starting to reach into the mainstream. Mt Gox is handling 70% to 80% of online trading of bitcoin. Mt Gox was poorly built, insecure and after it collapsed, prices jumped because bitcoin owners had to pay more to try to convert their cryptocurrency.
By 2014, an infrastructure started to form around bitcoin.
“You had the program. You had people looking for alternative ways to do things. So, you have the sort of viral community grow up around it. Personally, I think bitcoin is one of the three big social movements that erupted out of 2008. You had the Tea Party, you had Occupy and you had bitcoin. Bitcoin was a social movement and that’s why people are so passionate about it,” he said.
Vigna’s early days
After starting in community newspapers and making no money, he applied and got a job at Dow Jones rewriting news releases as an editor. In 2005, he started at MarketTalk where they had a 100-word limit to write tight little financial stories about the market.
In 2013, Vigna’s first reaction was not to write about this bitcoin thing. It’s a joke.
“My first reaction was this is some kind of scam. When not writing about this. But it was starting to permeate into the mainstream and we were hearing more and more about it. The more I heard about it and read about it, the more I was curious.”
Summer 2013, Vigna went to a one-day conference on bitcoin in New York. “It was the first time I’d ever been around bitcoin people. Again, it was a small conference, they had one room and a couple of hundred people.”
Readers and the newsroom didn’t show much interest in bitcoin. But at the conference, he discovered an incredible energy from a group of people with ideas about a new kind of financial world.
“I recognized the tremendous stories to be told about bitcoin,” he said.
Vigna describes the blockchain as a distributed ledger that tracks and verifies transactions that are transparent and impossible to change.
“Bitcoin’s ‘blockchain’ has never been hacked. You hear a lot of stories about hacking. It’s always some company that got hacked. The ledger has been attacked but never been hacked,” he said.
He describes how the blockchain can be used for every kind of transactions from real estate to art.
He recounts how in 2007 Lehman Brothers reported record revenue, record earnings, the best year in the company’s history of 150 years. Nine months later they’re out of business. How is that possible?
“Total accounting fraud, moving $50 billion in liabilities off the books. Which to this day Dick Fuld claims was legit. Which is hilarious. So, this is a really interesting program that would prevent that type of fraud,” Vigna says.
The transparency of blockchain scares banks according to Vigna. Banks are still trying to figure out how to get the benefits of blockchain without giving up too much in control with the system built on decentralization.
What are the legitimate uses of blockchain?
This technology fits our lifestyle today. We are digital, were online, we’re doing things across borders, across time zones, and across continents. This program will allow you to track these things and exchange value Vigna says.
Ritholtz asks if bitcoin is in a bubble.
“There are three huge angles to this whole story. There’s the software, which is really important in its applications. There is the counterculture movement, the social movement around it and it’s a big part of the story. In the third part is the speculative media, the trading part.”
Vigna says there’s no question there is speculation involved. He said it’s virtually impossible to determine what the real value is all about. He said you’re unable to validate and put a value and technology that is not finished its development yet.
There’s not a lot you can do right now with bitcoin except trade.
“It’s still a small market. A relatively small market. And a relatively illiquid market,” he says. Vigna says he personally would not buy bitcoin because it’s so speculative, even if he was allowed to in spite of the journalistic ethics that prevent him.
The podcast continues with Vigna’s recollections of writing his two books on cryptocurrency.
Crypto lovers are like gold bugs
Vigna says crypto lovers are like gold bugs in that they see cryptocurrency as a hedge against bad times and there’s also a bit of mania in the mix as well.
“They do have a similar psychology and they get so caught up in the idea that the world is terrible, and everything is going to go to hell in a handbasket and we’re just waiting for the next crash and you should put everything, and nobody should put everything into gold or bitcoin. I think that’s insane but that’s kind of their rationale, the argument,” he says.
Bitcoin aficionados think that bitcoin is the new gold in effect.
Companies growing up around bitcoin
He recounts the Mt Gox story and how the bitcoin recovered is now worth than the original amount stolen.
Coinbase was originally a wallet and now it’s a very big cryptocurrency exchange. At one point there online at once the number one app in the Apple Store. They made an estimated $1 billion last year.
Building platforms has become the latest big idea according to Vigna.
Other coins to watch
Within the 1500 or more coins there are five to keep an eye on. “No more than a dozen have any chance of surviving. Most of them are flat-out pump and dump schemes or their well-meaning efforts that are simply not going to go anywhere… Bitcoin, Ethereum, Ripple, and Litecoin are probably the four main ones,” Vigna said.
The offshoots like Bitcoin Cash, Ethereum Classic are also among the half-dozen biggest cryptocurrencies that have the largest market value right now.
“There are a lot of them out there but not really a lot of have a chance of building a viable future for themselves,” he added.
What the fork?
Ritholtz asks Vigna to explain “forking” to podcast listeners.
“Forking is a software term. Basically, what you’re doing is taking the software and updating it. You’re creating a new version of it in which it can have is a soft fork and a hard-fork. In a soft fork, you are coming up with a new version of it what the software will still work with it.”
A hard fork is incompatible with the previous versions of the software. In the open source community, this often becomes a political issue.
Initial coin offerings
Podcast host Ritholtz asks Vigna why he rolled his eyes when asked to explain ICOs. “Is it because they’re ripe for fraud?” he wonders.
“Remember, everything for me is the story,” Vigna says. “It’s a great, great story. It’s so much fun to write about. There are so many interesting angles to it. So, an ICO or initial coin offering is a way for companies to raise money. It’s kind of a cross between crowdfunding and an IPO.”
What Vigna thinks happened in 2017 was people were making a lot of money in digital profits. Here comes this other trend of the ICO. “Those two things merge, bang into each other and you have this unbelievable speculative mania, the ICO market takes off and I think it was $6 billion raised last year.”
Vigna adds, “virtually everybody expects all of this will be dead money in the end.”
The podcast wraps up with a chat about Vigna’s influencers, mentors, and favorite books. All in all, an engaging and enjoyable bitcoin reflection from a superb journalist and chronicler of the cryptocurrency days so far. you can catch the entire podcast here.