M. Reviewer: Michele Gianella We are at the dawn of the digital civilization, we have probably already figured that out because our mail has become digital, music and movies have become liquid, and all those things that used to sit on our shelves, like encyclopedia, have gone, replaced now by Wikipedia. Nowadays we expect, correctly or not, that an entire banking and financial system will fit in our smartphones. The Nobel Prize in Economics, Milton Friedman, had already predicted it. In 1999 he said: What we are missing now, and will be certainly created in a short while, is a digital currency mind you, not a digital coin linked to an individual but rather personal cash that can be used anonimously, by anyone, online. This prophecy has been fulfilled by the creation of Bitcoin, which absolutely is pole position in the race.
Why? Not so much for being, quite obviously, digital: our euros and dollars have been digital for quite a long time too. Rather, its because it is decentralized: there is no organization, no government behind it that holds the power to manage it and supervise its functionality. And this, albeit a bit scary, its a very strong guarantee that Bitcoin cannot be manipulated. Its that type of innovation known in the Englishspeaking world as permissionless innovation.
What does that mean? Its a type of innovation that has no centralized safety mechanisms, no entry checks, not even an editorial content control system. If youre getting scared by this seemingly anarchic plan, theres no need to worry.
Weve already witnessed this type of innovation in action, and it proved to be both effective and gentle. The email, for example: it was not invented by a consortium of postoffices, the Internet was not invented by a telcos consortium, So why should a transactional network of value be built by a consortium of banks? I cant really wrap my mind around it. I came across Bitcoin in 2014 I studied physics, and I worked for more than 20 years in the field of investment banks, finance and so on. But I had never asked myself, not even once, what money is.
The first time I thought about it was when I stumbled upon Bitcoin: up to now, thats the best gift that Bitcoin has ever given me. So Id like to play a game with you, lets try and go over the history of currency in only three minutes. Here we go! The earlies form of currency we find in history is gold.
Why? It might seems weird, but gold had two peculiar characteristics: there wasnt much of it, and it shone. Turns out, human beings love shining things. Gold was also quite malleable, and it is fairly easy to determine its purity. Take a pot, put it on the fire, let the gold melt and then wait for it to cool down.
If its still shining after this thermal shock, its definitely gold, trust me: any other material would stop shining, But if for every business transaction the process needed to be repeated, it would have been difficult. So we asked Julius yes, I mean Julius Caesar Look, Julius, how about putting your face on the gold coin as a guarantee theres that much gold in it? The first deflationay crisis came about with his heir, Augustus Caesar.
Even the peasants realized, sestertia did not contain the figure amount of gold. But for the medioeval merchant, gold had even another problem: it was really heavy. Gold has a very high density, so it was uncomfortable to carry it around. And also risky, for you can be robbed by bandits. Almost at the same time in history, Londonbased goldsmiths and those who would later become the Italian bankers, they came up with the same idea: they suggested the merchant to leave the gold in their vaults in exchange for a certificate that first was nominal, and would later become a bearer certificate.
It was a banknote with which one goes to her pawn counter and redeem her gold back. Thats how the banknote was born: a currency that represents an amount of value stored elsewhere. But both the Britons and the Italians couldnt resist a temptation: after noting that most of the time people did not ask for the gold back. So they had what we might call a spark of genius. They thought: If we print more banknotes than theres gold in our vaults, who will notice it?
Do you know what the answer is? No, no one! So the fractional coin appeared: there are more banknotes that the redeemable gold.
Jumping forward in history: in 1972, even in a regime of fractional currency, the redeemibility of money, US dollars in this case, in gold, was still a limiting factor for those in charge of monetary policy. But Richard Nixon had enough, and he decided that the US dollar couldnt be converted in gold anymore. From that point on, we have Fiat money, and I do mean exactly Fiat Lux et Lux Fuit: a currency whose value is purely conventional, its value its based on a social contract that we all agree on. And if someone does not agree, we can force that person by using something know as legal tender, which means that fiat money must be accepted to pay back a debt. Let me say it, this is a bad coin, actually, we could even say that its a terrible coin: we dont need to recall the most egregious examples in the history of money.
Our dear old friend US dollar, already proves it: its performance its not exactly impeccable. Starting from 1913, the year in which the Federal Reserve was funded, the USA dollar has lost more than 96 of its purchase power. That means, its a bad currency. Its the typical result of a monopoly situation.
Friedrich von Hayek, Nobel Prize in Economics and founder of the Austrian school of economic thought, wrote an entire book bemoaning the fact that: We deem essential the governments monopoly of the currency. We would accept the monopoly over no kind of good, in a market economy. Yet we do accept the monopoly of that syntethic product that has half of the power in any business transaction: the currency. Like any type of monopoly, not only it delivered us a bad product, but it forbid us from looking for a better one.
Therefore, Hayek did conclude: If we ever want to have a good currency again, we have to take it away from the control of the States. And since we cannot do that using force he was a good man, and I comply with his invitation we should do it with a clever gimmick, something they wouldnt be able to stop. Bitcoin is exactly that clever gimmick. Now lets try to dive deeply into what a currency is.
Money is, in its essence, a tool for social relationships. I know that this might not be the definition you were expecting but if you think about your own experience, we were all born in a gift economy. I hope that none of you had to pay for all the parental care you received: otherwise I would feel very sorry for you all, and quite happy for your therapist, who will certainly have a lot to work on with you.
But this gift economy doesnt only encompass our family, our friends, our neighbours, what we could call our tribe. Its an economy that doesnt scale, because sooner or later we will run into people we dont know, and that is why we dont trust them or maybe, sometimes, we dont trust them precisely because we know them, which is more or less the same. But we are inherently social animals, thats what we are anthropologically, so we want to cooperate even with those we do not trust. So, at first, we invented the practice of bartering: I give you my eggs, but it just so happens youre going to give me your milk today. Alternatively, in order to barter anywhere and anytime, we invented the currency: a syntethic good that allows us to cooperate with people we do not trust.
Im not sure about you, but I hope for a moment of intellectual upheaval, because I reckon this remark as hugely important: a currency is a tool we use to cooperate with people we have no trust in. So its quite clear that, today, in what its for the first time a digital and global information economy, the need arises for a supranational currency, a digital coin, not controlled by states, a global currency, a currency of the Internet. The problem is, it is insanely hard to create an Internet currency.
The biggest problem is known as double expense problem. Every time that we have a digital artifact that represents a value, weve always needed a centralized authority in order to prevent its duplication. Digital as it is, its easily duplicable. Its easy to grasp: consider your current account balance. If I transfer my current balance account to your account dont get your hopes up, I dont have that much money and then I try to transfer it again to the gentleman here, my bank, which controls the updates of the ledger, is going to tell me: No Ferdinando, you cannot do that.
How are we going to create a valuable digital asset, that is to say an nonduplicable asset? Because think about the painting Gioconda. Gorgeous, no doubts about that.
Its market price is incalculable. But if the painting could be duplicated without control, for an unlimited number of perfect copies, it would still be gorgeous, but its market price would drop down to zero. Thats what is happening with Bitcoin, and its limited to 21 milion Bitcoins. Bitcoin, in a way, is as scarce as physical gold: gold on the physical level, Bitcoin on the digital level.
Bitcoin is, or at least is aspires to be, the digital counterpart of gold. And now Im going to hope for a second moment of upheaval. Im pretty sure, you all today came here in this theatre believing every digital thing can be duplicated.
This is the very intuition that Bitcoin proves wrong: Its a digital gold and attached to it, inside of the Bitcoin itself, there is a transnational network, which is both safe and notcensurable, that can be used to transfer this gold globally. I know you are skeptical, I can see it in your faces. Lets play another game, then: imagine that an alien was going to land here, okay?
You have to explain the traditional currencies to him, and Im going to explain Bitcoin. I will start right away by telling the alien: Look, their currecies have no inherent value. At this point you might respond, slightly irritated: The same goes for Bitcoins, Ferdinando!
And I will say, you serious? Ive just explained to you the shortage in the digital world!. But your game is easy: What about the social contract, centuries of history of the currency, the legal tender Alright, 11, time for the kickoff, lets start this over. This time Im going to start by pulling your leg, saying that the cash you carry around is just a bunch of colored paper. Yeah, right, special paper, special ink: but, lets be honest, its just the same as the cash in the game of Monopoly.
My coin, on the other hand, is pure math and encryption. Not only that, I will also tell the alien that while I am a kind person, Im not forcing my Bitcoin on you, you are instead rather coercive. I cannot refuse your euro.
The legal tender tells me, if a debtor wants to settle his debt with me in euro, I cant deny him that. Im goint to let you figure out how the alien is going to see all of this. Oh, I almost forgot, maybe I should also tell the alien that a gentleman, in Frankurt a very composed gentlemen, the most serious of us all he can print as much of that colored paper as he likes, whenever he likes, and give it to anyone he likes. He was not elected, and he wont need to take responsability for how he carries out his duty.
Meanwhile Ive already explained to the alien that Bitcoins monetary policy is perfectly deterministic, it cant be influenced. You might say: Right, but no one is using Bitcoin. there are no business transactions carried out using Bitcoin. Thats for sure: those who bought, in 2010, two pizzas, paying them 10.000 Bitcoin which at the current rate woul be 40 milion dollars Well, lets just hope that those pizzas were really, really good, because I wouldnt have been able to digest them in any way. Bitcoin is a safehaven asset, so its stored. Therefore it makes much more sense not to compare it to a currency, but to actual gold.
Gold has been accepted by all civilizations as the earliest form of currency, without any type of centralized planning. It was for centuries the most successful currency, it set off the development of all the monetary systems we know, it was overtaken by forms of currencies much more sophisticated without it becoming outdated. What happened over the centuries to physical gold, is happening in these ten years, and will probably happen in the upcoming decades, to Bitcoin.
The Bitcoins most scary trait is the value volatlity: it goes up and down. There isnt much to fear, to be honest. I mean, every time someone talks about Bitcoin you should fasten your seatbelts, because the ride tends to be quite bumpy.
But Bitcoins volatility is physiological. When market mechanisms of supply and demand try to assess the value of a certain good, if the product is controversial, like digital gold, the process is going to be just as mush controversial. Weve seen it already happen, in history, with ecommerce: take a look at the history of Amazons ratings, its volatility. The worrying part about Bitcoin is the socalled drowdown: highest to lowest point, it managed to lose more that 93 percent of its value.
So my bottom line is, if you ever plan to invest in Bitcoin, do it with a small percentage of your savings, small enough that you would be able to reasonably sustain its complete loss. The good news is that Bitcoin is not correlated to other investment asset classes, to other investment opportunities: It doesnt move with them, it diversifies the risks. So, if put it in an investment portfolio, even if it sounds counterintuitive, but it draws dawn the risks of that portfolio, expected rate of return being equal, or, given the same risk, it increases greatly the expected return. So it is a good idea to invest a small amount in Bitcoin, and this gives us a cue for some final considerations.
Lets imagine that 2 percent of the assets under management Im not referring to 2 percent of the global wealth, but 2 percent of those assets that are professionally managed lets imagine that they invest in Bitcoin over the next few years. Well, if we do the math, the value of a Bitcoin is going to be a hundred thousand dollars. But if Bitcoin is, or proves to be, the digital gold I say if because its a bold experiment and it might fail, lets not forget that, but its an experiment substantiated both culturally and technologically again, if it proved to be the digital gold, well, ladies and gentlemen, it would be better than actual gold: extremely light, instantly transferable, low transactional costs, no logistic problems, noncensurable and unstoppable. Therefore, if Bitcoin was to capitalize the same amount as gold today, its value would raise to 400.000 dollars. 100.000 dollars, 400.000 dollars Im not here to sell you Bitcoin, Im just saying, if Bitcoin is digital gold, its currently greatly underestimated.
Someone might object saying that: Ive read that its not Bitcoin, Its the blockchain, the technology underlying it, the real deal. When it comes to this, I love to paraphrase Confucio, he said: When a wise man points at the moon, the fool looks at the finger. The moon is Bitcoin, the finger is the blockchain.
You cant overlook the relevance of the Bitcoin phenomenon. If you have the slightest understanding of the role that gold played in the history of civilization, finance and currency, the rise of golds digital counterpart in the digital civilization and in the future of finance and currency is going to be explosive. I would like to end with a thought: 2527 year ago, I used the email and surfed the web, but Id never imagine that on top of the TCPIP protocol, the technology underlying the web and the email, would be used to organize our weekends in digital clubs Facebook, or buy liquid, digital books and CDs from online shops, or we would ask questions in natural language to a computer, a digital assistant, expecting a meaningful answer.
I cant tell you, 20 years from now, what we will be able to make on the values TCPIP protocol, which type of incredible apps we will have managed to create: thats exactly the adventure that is waiting for us over the horizon. Thank you. Applausep