Crypto, Blockchain, & Bitcoin – Podcast

In today’s episode Nicholas Olesen, CFP®, CPWA® and Nicholas Ryder, CFA® talk all things crypto and blockchain with the Director of Research for Digital Assets at Forbes, Steven Ehrlich. 

During this timely conversation Steven shares his expertise and insight to answer the most relevant questions about digital assets. A few of the questions we covered are:

• What is a blockchain and what keeps it secure?
• What are cryptocurrencies and crypto assets?
• Why are there so many different cryptocurrencies?
• How are Bitcoin and Ethereum similar and different?
• What are the biggest risk for anyone thinking about investing in cryptocurrencies?

Steven writes an in-depth newsletter on the crypto space and was kind enough to provide a substantial discount to our listeners and readers.  Click here to sign up: http://forbes.com/cryptowealth

Please send us feedback and any topic or questions you would like us to cover.  Email us at: [email protected] 

Transcript from our conversation:

Intro: [00:00:00] A wealth of advice is an open exploration of ideas and actionable advice with the goal of helping you to achieve your personal aspirations. The team at Kathmere Capital and their guests strive to deliver thoughtful insights on how to manage your wealth, realize successes in your career and live a healthy personally fulfilling life.

Nicholas Olesen: [00:00:18] Hi, thanks for tuning in A Wealth of Advice. My name is Nicholas Olesen, Director of Private Wealth at Kathmere Capital. On today’s podcast we have an extra special guest, Steven Ehrlich, who is the Director of Research for Digital Assets at Forbes. We asked Steven to join us to share his expertise and insight into the world of crypto assets, blockchain and Bitcoin specifically.

As you’ll hear, Steven has a deep knowledge in the space. Having previously worked at the cryptocurrency exchange Kraken and was COO at Wall Street Blockchain Alliance. Steven was also kind enough to provide a discount code to his great newsletter at Forbes. So be sure to check that out in the show notes and listen to the end, as Steven talks about the reasons the sec has not yet approved an ETF, but why that’s most likely coming this year? We hope you enjoy this conversation.

All right, Steven. So I really appreciate you joining us today. As, as we talked about in the intro, what we want to do is cover something that’s been in the press, you know, for months and years now, but really is I think hit kind of peak newsworthiness and especially some of the newsletters you put out, I think are interesting.

And I wanna, I want to dive into them, but. To put it in context. What we’re talking about is crypto assets, blockchain and Bitcoin. And so I want to start with those, those first two, which is just the broad question of what are crypto assets and what is broad blockchain. And you can take that in whichever order you think makes sense.

Steven Ehrlich: [00:01:33] Yeah, that’s, that’s a great sort of a great question to lead off with because there’s a lot of confusion about those there’s different terms. Crypto assets, there are a few different types, but I guess the most basic, or I guess the purest form of the word or the term is what we know as is what we call sort of a decentralized crypto assets. Decentralized because there’s no one central issuer such as Panera for loyalty points or airline miles that, issues them keeps track of who owns what and could theoretically exchange or, or revoke them. And it’s and it’s a crypto asset because it relies on cryptography to keep the network secure and also help people authenticate themselves so that they can spend the assets that they, that they control.

Don’t necessarily need to get into all the details of how that works. But. But when it comes to the decentralized blockchain, which is the database or ledger on which these different assets runs, because there is no central party that controls it, you need a way for all these different nodes and network participants to agree on who owns what, and when transactions are submitted to pool the order in which they’re added to the blockchain, make sure that And make sure there’s no duplicates.

And so there’s that we’ve allowed on encryption to help make that happen. And then again, when it comes to authenticating yourselves to spend Bitcoin or Ethereum other assets that you have we rely on something known as public key infrastructure, public key cryptography to make that happen.

So the, the two real conditions that you need for crypto assets, like Bitcoins. Or that they are decentralized and that they rely on cryptography to help keep the network secure

Nicholas Olesen: [00:03:11] That’s a, that’s a great kind of kickoff of it. And just to kind of calibrate or reorient people with some of the names that we’re talking about, so if somebody has no clue at all what we are talking about.  Bitcoin is a cryptocurrency which we’ll touch on and talk about, can you dive more into this blockchain? Like without getting into the real details? Cause that’s not what we’re trying to do here, but more, how does it work? And then what’s the biggest benefit of this blockchain?

You know, again, this decentralized, I think is the key terminology here.

Steven Ehrlich: [00:03:38] Correct. So, so each blockchain is a little bit different, but the idea is that again, it’s, it’s a, it’s a decentralized network or platform or, or, or ledger that helps keep track of who owns what, when it comes to a specific asset.

And so it works by say, I want to send you $10 with a cryptocurrency. I’ll initiate a transaction from, from my phone or device or wallet. I will I’ll initiate a transaction where I send. I, I send instructions to, to the miners or nodes, essentially the payment processors for a given network to deduct $10 from me and give it to you.

And these miners are the ones that will actually group all these transactions together. Because there’s multiple that are added at one time, put them into what’s known as a block and each block is then built one on top of another, on top of another in sequential order. So that everybody even non-participants could actually look at these blockchains and make sure that they’ve kept their fidelity, that they’ve kept, that they’ve been secure.

Some of the benefits that come from this includes, again, security immutability. The idea that once something at once, something is added to slash, and this is again also where encryption comes in the blocks are cryptographically tied to one another. You can make sure that they have not been altered from their original state, which is also very, very important.

And then also speed. And for instance, there’s a joke and you’ve probably heard it as well in the crypto community, right. The fastest way right now to send perhaps $10,000 from New York to London is to get onto a plane with a duffle bag. Yeah. And Bitcoin I mean they transactions are added to the network every 10 minutes.

Other blockchains are much faster than that. So you could theoretically spend 10 you could send $10,000 worth of Bitcoin from, from myself to a cousin in London for a few dollars and it would get there in 10 minutes. So speed is also a big benefit. Okay.

Nicholas Ryder: [00:05:32] Hey, Steve Steven, one of, one of the comments I often hear is from people talking about crypto assets, blockchain broadly, that.

This concept that, you know, they see all the benefits of blockchain and they’re quote unquote bullish on blockchain, but they’re far more skeptical of crypto assets. Can you talk about what, what people mean by that is that, you know, a, a logical statement or just kind of curious on your thoughts when you hear that statement?

I’m sure. You’ve probably heard it many times.

Steven Ehrlich: [00:06:03] Yeah. And I certainly haven’t and it’s a fair point, especially when it comes to. Organizations, major organizations that are regulated that are starting to touch their toes in the space. I mean, one of the other big benefits of blockchain is that they are open ones, at least where Bitcoin and Ethereum support they’re open.

So anybody can participate. You can’t really block anyone. And that’s very scary to, to some companies. What they’ve tried to do is create, what’s known as. Permission blockchain permission, ledgers, where they sort of have a certain level of decentralization, but only authenticated or permission nodes are allowed to join.

And there might even be higher levels of permission. On top of that as to who can actually can, can see a transaction versus who can initiate one there’s different levels of privacy that can be built in, so that perhaps if the 10 banks who run a consortium to help with like, like. Wholesale payments.

Certain banks can only see transactions to which they’re a party of and they can’t see everything going on because that could potentially compromise privileged information. So so they, they try to find a way to use some of the benefits of blockchain while keeping a bit of a barrier around it. And then the added benefit as I just alluded to is sometimes you can add on some more customizable features to support specific use cases, such as insurance or payments or identity data personal data, sharing, PII, things like that.

It’s definitely been an ebb and flow, an ebb and flow over the last seven or eight years. It was like one year permissionless, blockchains are in Vogue, then it goes, switch it to permission, permissionless permission. And it kind of goes back and forth, I think, especially because of what the crypto markets are doing right now.

Permissionless ledgers are certainly sort of on the up and up and permissioned ledgers perhaps are not quite as public right now, even though the are still doing a lot of really important things. Personally, I believe that at some point we’re going to see a merge between the two, because what you don’t want to have happens is that these permissioned ledgers become almost a blockchain in name only.

And they’re really just  centralized databases that multiple parties have access to, which is something that we already have today. Anyway. So I do think at some point at maturity, we’re going to see them converge and I’m not quite sure what that’s going to look like yet.

Nicholas Olesen: [00:08:20] Oh, that’s great. That’s helpful.

And so to put it in the way I would think of it then is what you’re doing is, and you said this the way the transaction happened is permission versus permission, less. And the. I guess ideal world in, in the form of those that, that really enjoy crypto and blockchain. And think this is the future, is that the permission list side?

Because you take out any organization who is able to, or regulatory body or anything is able to stop somebody from acting on those ledgers or in those assets, whatever assets we want to talk about in a second. That’s the ideal world versus having this third party or, you know, go back to the bank issue that you said or gave the example of.

Transferring $10,000 over, you have to get validated from the bank that I actually do have the $10,000 they’re going to hold it and then give it to you. Is that fair? Is that kind of a fair way of thinking about that?

Steven Ehrlich: [00:09:15] Yeah, I would. I would, I would, I would agree. Okay.

Nicholas Olesen: [00:09:18] Okay. And what are when, when we go into, so that, that explained blockchain.

When you look at crypto assets and cryptocurrencies, is there, is there a difference between those terminologies? Or are those interchangeable?

Steven Ehrlich: [00:09:34] No. And that’s an important question as well, that there are differences. I think the crypto assets sometimes is thought of as a catch all term. Although to be honest, I think the lowest common denominator might be something more on the minds of digital assets, because there are some, there are some digital assets that are kind of lumped into crypto assets that may not actually Fit like the purest form, the definition.

And for that, I’m, I’m alluding to things like central bank, digital currencies, such as what’s being built in China right now, which we can talk about if you want that. I mean, really are not going to run on a blockchain, especially in open one. I mean, it’s just going to be a form of electronic currency.

That’s going to be on the database that the Chinese government controls, but I mean, digital assets, crypto assets in a general sense, they. In my own mind, they refer to assets that rely on cryptography to work for people to authenticate themselves. The networks remain secure and are generally permissionless.

But that said there’s many different use cases for crypto assets there are cryptocurrencies, which try to mimic money as a store of value of a medium of accounts. And a unit of exchange. There’s others that are sort of intended more to be like a safe Haven asset, such as such as Bitcoin. Bitcoin probably has elements of both money and and a store of value.

And then there’s other. Almost like a crypto assets that are something akin to to commodities. And that’s perhaps like Ethereum, which is almost like peel or a blockchain so that you can execute transactions. And then of course there actually are digital assets that are designed specifically to be money.

And for those I’m talking about stable coins, which are created so that they maintain a peg with a certain underlying asset that the dollar Euro pounds, what have you some of those are created by actually backing those assets with physical dollars in the bank vault. And sometimes they’re created on the back of sort of algorithms that sort of automate automatically execute the monetary policy to try to maintain a price peg. So, so there’s a lot of different flavors of, of digital assets that we can talk about. Okay.

Nicholas Olesen: [00:11:50] And then, and kind of diving into those, those different ones. Let’s, let’s touch on the currency side of things. Cause I think that’s the one that probably most people are most familiar with, you know, especially Bitcoin having heard that you know, we were part of the discussions in 2016, 2017, is that rose and then fell and then. You know, now it’s back to you know, way all time highs versus where it was then what I’ll first start out with.

Why are there so many? I think that like, when I talk to clients about it, their first question is like, I get Bitcoin, I’ve seen it, but you know, so-and-so was talking about this or I log on to an app and it gives me 30 different cryptocurrencies.

 Is that hurting the goal of what crypto is? So it can a couple of questions in there.

Steven Ehrlich: [00:12:30] Yeah. I mean, I’ll give you the quick answer for why there’s so many and, and that’s because these are permissionless. So all of the code is out there, free for anybody to see, and it’s very simple to sort of alter it, alter something slightly, and you’ll create, what’s known as a fork or a sort of a divergence from it.

And you create your own cryptocurrency. I mean, I could create Steve coin or you guys could create a Nick and Nick coin, if you want. I mean, it’s going to do it. It won’t have any value. Yeah. It won’t have any value because one, many people won’t know it exists. And two, unless you sort of build a critical mass of mining power on the network, it won’t be secure, but it just like any sort of open source project.

Free for anybody to take and use however they want. So that’s why there’s thousands of, of, of crypto assets. Sorry. I forgot the second part of your question.

Nicholas Olesen: [00:13:24] Do you think that that kind of hurts the theory behind the future of cryptocurrency? Yeah,

Steven Ehrlich: [00:13:31] not, not necessarily because I do think that most public knowledge is concentrated around the top few. I mean, if you look at polling and survey data at this point, I would say most Americans are probably heard of Bitcoin. We just anecdotally. Now if I, if I pass neighbors, if I talk to friends and they ask them, if they’ve heard of Bitcoin, the answer will be, yeah. They may not know a ton about it, but they will have heard of that.

Just because again, as the. The massive price search that you alluded to has happened over the last six to nine months. It’s almost impossible to avoid it, a thing with Ethereum, which tends to be the sort of the second sort of call for investors once they get comfortable with, with Bitcoin. But then there are also joke currencies.

I mean, as we’re recording this today, Dogecoin, is it sort of a, a meme coin that really was designed to be a joke? Has. I think becoming like the fifth or sixth largest, if the currency by market cap banks like Barclays and ING and in total value, which is, yeah. So there’s absolutely no reason for that to have happened.

And I think it’s sort of a, I think there’s piggybacking off of the game stop momentum, but things like that could be hurtful. I mean, one of the things that I try to do when I advise my readers is to not all victim, to some of these joke coins that really don’t have. Technical sophistication and security behind it.

I mean, that’s the biggest fear, not, not that all of these, no model know which coins to take seriously, because I think that’s starting to filter out, but I don’t want people to get caught up in pump and dump schemes and like make emotional FOMO led investing in some coin. They read about this, the new hot thing and, and they end up buying at the top and.

Giving giving somebody all their money. That’s the one thing I don’t want to see happen. Sure.

Nicholas Olesen: [00:15:19] You have a great newsletter put out through Forbes and, and we’ll link so that people can, can sign up and you know, get that subscription to it. But one of the things that you have on there. And so I just want to touch on kind of the top two.

I think what people probably know about when we’re driving, diving into these crypto assets and cryptocurrencies is, is Bitcoin and Ethereum. You know, Bitcoin being the largest by far as far as. Quote, unquote market cap or value on the network. And Ethereum is a not close second, but you know, much higher than any other one.

Can you, can you tell us the benefits of each one and, and the differences?

Steven Ehrlich: [00:15:54] Yeah, absolutely. So, so Bitcoin is really the original cryptocurrency or there has been attempts to create. Cryptocurrencies digital currencies in the past, the idea did not originate with Bitcoin, but they were really the first the creator of Bitcoin to Sudan to Toshi Nakamoto was the first to kind of put all the pieces together.

That’s defined something that actually works is scalable is, is defensible. And most importantly, has this quality known as Byzantine fault tolerance, which basically means that the nodes, the network can remain, can maintain the fidelity. Even if a large minority of actors perhaps could be adversarial or actually working against the network, trying to trick it et cetera.

So it’s a very It’s actually, it’s, it’s simple and elegant by design, but very sophisticated underneath Bitcoin was actually designed to be a payment system. When the white paper was dropped, I believe on Halloween night in 2008, it was called the Bitcoin a peer to peer. Payment system. And that was kind of the idea behind it.

I mean, it was, it was built in the wreckage of the financial crisis where people lost faith in governments and lost faith in banks. And me, it was very much a libertarian, almost like anarchic Pega type of project. Right problem. There, there were two real problems with that. One is that Bitcoin’s throughput is really only a handful of transactions.

A second. Which is, which is not nearly enough, you think about what visa or a, or, or MasterCard process, which is, I think tens of thousands of transactions is that can I think Bitcoin depends on like seven to 10 or something like that. I forget the exact number, but it’s, it’s nothing close. And then two it’s so volatile that it really can’t work as money.

It’s about slowly starting to go down a little bit, but. I mean, think about it. If you are a merchant and you have to pay suppliers, are you going to accept Bitcoin and wonder if the amount of cash you hold on your, on your books is going to go up or down by 20 or 30% in one day, it’s just not tenable. So for those two reasons that the narrative has sort of shifted from Bitcoin being a form of money.

To almost a store of value, a safe Haven asset. And, and that’s also due to the fact that and this is actually one of Bitcoin’s big value propositions. And one of the reasons it has a certain degree of intrinsic value, which I haven’t mentioned yet, which is that it is hard cap to 21 million units that that’s baked into the protocol.

So that never changed. So it’s known as a deeply missionary asset. And right now I believe we’re at eight. 18.7 million of them have already been created. So the last one will not be mined until you’re 2140, but they get mines at a detailed rating rate. You may have creative. These new blocks actually halves every every four years.

Right now we have 6.2, five Bitcoins get created every, every block which happens on average about. And minutes. So this, the scarcity is something that also underlines its value proposition. And that’s why you see a lot of institutions right now, trying to stake out big positions because they recognize that although it’s risky assets, if they ever were going to make a big allocation, it’s getting late, very, very early.

So, so that’s Bitcoin. So is that,  sorry,

Nicholas Olesen: [00:19:08] guys. So just to cut into, to just ask a couple of questions, just to dive in more on this, and then we’ll talk about the difference with that. So, so Bitcoin story has changed because I think that was the first thing in, in 2016 and 17, everybody said, well, it can’t really actually be a transaction or used as money because.

Again, the visa example, it can’t, you know, you can’t transact that much on it. So that story has changed to kind of store a value. When you look though, and, and switching to then say this, this minor side, can you dive in a little bit more? Cause we didn’t touch on that. When we talked about the blockchain, like what is a minor, what’s the, you know, what’s the advantage of them and then the security behind Bitcoin.

I think that’s, that’s a big thing.

Steven Ehrlich: [00:19:51] Yeah, absolutely. I mean, I mean, Bitcoin can certainly be used for payments, but what we’re seeing is that it tends to be more useful for larger payments because they happen less frequently. And as the fees have gone up from what were originally a couple cents, and now it’s now several dollars per transaction.

But you need to it’s something almost to canvas sending wires. It’s sometimes it’s reserved for more high value transactions, but going back to your question about, about minors. So when I send a transaction, when I send a payment to you, there has to be a way for it to actually get added to the blockchain.

There are nodes which in Bitcoin are known as minors. That are actually responsible for collecting all these transactions that are submitted to the network, making sure that they adhere to all the rules of, of the Bitcoin script and then putting, and then submitting a block to the blockchain for inclusion.

So obviously that takes work. They deserve to be compensated or where that work, where they get compensated is because if a miner finds a block and a block, they get. They, they get compensated in two ways. One they get fees. So I, if I perhaps send you $10, by that point, I might include a transaction fee, almost like a tip of 50 cents.

So hopefully I’ll get prioritized over someone that perhaps only submitted a fee of 30 cents for instance, or, I mean, nowadays it’s much higher, but that’s, that’s the idea. And then the second way to get compensated is because in a block, they add every transaction that they can fit within the data limits of the block.

And then they get to create one more transaction where they create 6.2, five Bitcoins that they can send to their own wallet or OTR wherever, wherever they want. So that’s how they get compensated. But of course they’re extending energy. They’re spending resources, which is why they deserve the compensation.

That’s also where a Bitcoin security comes from. Bitcoin will use these decentralized networks, need to use something called a consensus mechanism. It’s a way of making sure. That everybody agrees on which the next block that gets added and so on. So on and so on. So what’s happening is these thousands of miners, at least in Bitcoin, are racing to solve the very complex math problem that it is incredibly hard to figure out and requires massive amounts of computing power.

And whoever answered the question first, they submit their blocks to, and which happens on average every 10 minutes, they submit that block to the network. All the other nodes that were racing to solve that block will see it. They’ll verify that it’s authentic. They’ll all add, update their ledgers at the same time.

And that block will be added. And then the race will start all over again, over and over and over. So, and, and that process is known as proof of work because it takes work. It takes computing power to do this. And it’s because of all this computing power. That is very hard or another party and compromise the network because they would have to deal.

It would have to control over 51% of all the computing power on the Bitcoin network, which at this point is only possible by large nation States. And, and that’s sort of why Bitcoin has become more secure and has become almost provably secure. Whereas a lot of other blockchains. We’ll never get that sort of escape velocity where they’ll be immune to compromise.

Okay.

Nicholas Olesen: [00:23:10] That, that, that was really helpful. So, so let’s, now let’s go back to know that that was that’s that’s, that’s a question we get all the time, which is why is it so secure? You know, again, the decentralized side of it saying there’s not an institution you can say, I believe in all of this it’s, it’s this number of, of network nodes.

So yeah, that was really helpful.

Steven Ehrlich: [00:23:30] And just quickly too, from a security point of view, there’s a difference between network security and individual security, because you’ll hear all the time about somebody having their phone hacked and losing their Bitcoin or Bitcoin exchange, getting tackled. Those are, I mean, those are centralized entities or individuals where like, you need to use good password hygiene.

I mean, you need to, if you’re going to buy some exchange, it needs to be a trusted one with a good security setup. Those things have absolutely nothing to do with the Bitcoin itself or, or theory. And, and that’s a big misconception that I typically say.

Nicholas Olesen: [00:24:05] No. And you actually, you touched on that in the latest newsletter, the implosion of the very first Bitcoin exchange Mt.

Gox for anybody who paid down for back in 2017. And that, that did kind of spook those that didn’t understand the difference between a Bitcoin exchange and the actual network. So that’s a, that’s a great clarity point there

Nicholas Ryder: [00:24:22] where Steve, where do you think we are on like the, the continuum in terms of, you know, w we’ve built out the ecosystem insecurity around, you know, traditional brokerage, like.

Now we have Coinbase crack in Geminis of like, where are we in terms of that progression? Like in terms of these becoming, you know, more stable, reliable, secure institutions, akin to what we’re already familiar with, like with the Schwabs and

Nicholas Olesen: [00:24:44] Fidelity’s of the world.

Steven Ehrlich: [00:24:47] Right. That’s a great question. So there are some exchanges, especially in the us that are very secure and you actually just mentioned probably the toughest rainy Coinbase.

Crack it and we’re actually used to work. So I, I sort of know what’s going on. Yeah. Firsthand. And, and I mean, Gemma and I are all very, very secure. I, I think Jim and I even got SOC one and SOC two certifications, and I mean, it, it’s a very sophisticated type of type of setup on top of that. One of the other big things that we’re seeing is a lot of major traditional banks are getting into the the crypto custody.

Business. We, I mean, Stony banks BNY, I think, is doing something Deutsche bank is, is doing something because they recognize that they, they recognize that their clients want to invest in crypto assets. These banks want to have a 360 degree view of their client’s portfolios and it’s a natural.

So the next step for them to hold these assets on the pass, that they already, that maintain all of their other types of X of assets. And actually some of the work coming out of the, the OCC, the office of the controller of currency that the national bank regulator has actually helped clear the way or for banks to offer some of these services as well.

So so custody is one of those areas that’s necessary, especially for institutional investors. And it’s definitely it’s, it’s not a sexy topic to talk about. It’s accelerating very quickly. Okay,

Nicholas Olesen: [00:26:16] great. Thank you. What so let’s go back. I think I, I pulled a thread and then we, we got way off of it.

So we talked about Bitcoin and what makes it quote unquote special or different? What, what about a theorem? Can you give us the rundown on what makes that different unique? Why do, why is it so attractive for people?

Steven Ehrlich: [00:26:36] Bitcoin. One of the other reasons Bitcoin is very secure is because it’s actually relatively limited in what you can do with it. I mean, it’s really designed to to send Bitcoin from one person to another. I mean, that’s, that’s primarily its only use case. And one of the things that I guess probably about 2014, 2015, a lot of crypto and blockchain and busiest realized is that, you know what?

We can do a lot of cool shots. On blockchain that we could have digital identity projects. We get up social media, we could have data storage, we can have all, all sorts of applications that Bitcoin can’t do that because it wasn’t designed to a more sophisticated that you make code. The more chances are that you’ll find bugs and things can be exploited and they didn’t want to risk that.

So actually the creator of the Syrian he’s a Canadian by the name of the Vitalic Buterin Trying to actually build something on top of Bitcoin realized he wasn’t able to and decided to create an entirely new blockchain called Ethereum along with a new programming language called solidity.

That was really designed to sort of be like a touring complete system, essentially it could it could execute any type of. Smart contract, which is basically just a an auto executable piece of code that if something happens, it will do this sort of like if, then type of statement, and it can be used to build a decentralized version of essentially any internet company or use case that you could, that you could imagine.

So so Ethereum. It, it was a new blockchain chain. Sirium is the name of the blockchain. Ether is actually name of the asset, the data asset to it. And you have to pay the miners, just like just like if I’m sending money, I have to actually submit money to our smart contract, pay a smart contract.

That’s why I say ether is sort of like a commodity or another way sometimes to think about it as amusement park tickets. If you want to ride on carousel, you have to give a ticket, same sort of concept where if you want to engage with the smart contract. Or a decentralized application or a bunch of tacos, Ethereum, you have to pay for it with the native currency called it’s called ether.

So it was really designed because there were use cases that people were interested in that Bitcoin just was not it was not designed to support.

Nicholas Olesen: [00:28:45] Okay. And is that, that is what is being used in, I think some, some other ways that that individuals will be familiar with crypto assets is all of this NFTs and other things that’s, that’s backed by Ethereum.

Is that fair to say, or, or kind of what’s the relationship there?

Steven Ehrlich: [00:28:59] A lot of them are so not to get too wonky, but I mean to kind of go a little bit deeper into, into a Sirium. So. Ether is the token, the sort of like the protocol token that helps Ethereum go. But one of the things that one of the things that Ethereum developers did that was really smart is they created something called token standards that you could actually create tokens that are not ether, but actually run on top of, of the theory.

W the, the most well-known one is something called ERC 20, where you essentially can create fungible tokens or font on top of the cereal. And for anyone listening to remember the ICO phrase from 2017, 2018, where price of Bitcoin is searing went up and a whole bunch of other tokens that you never heard of.

These are all ERC 20 tokens. Granted, I think people got a little too excited, but the idea was still valid. So if I was running an identity app or a data storage app that runs on top of Ethereum, then some of these tokens are the ones that I would actually use to, to engage with as applications for NFCS because an accused by definition, it has to be non fungible.

They use a different token standard on top of Ethereum called ERC seven 21. Which again, Nicks interoperable with, with wallets and applications run on top of Ethereum. But each one is token has a truly unique identifier, which is part of the reason why those those have become much more in demand, but not every NFP or NFC marketplace runs on top of Ethereum.

There, there are plenty of others, for instance, a NBA top shot, which is probably the most popular in the marketplace right now. It runs on top of a native blockchain called, called flow, which was designed by the company behind MBA Capshaw, dapper labs, that it was customized to, to work with NFTs.

Nicholas Olesen: [00:30:55] Interesting. Wow, this is, yeah. Okay. How about,

Nicholas Ryder: [00:30:58] I’m just curious on your take Steven around. I don’t know how many cryptocurrencies there are in existence today. I think I’ve heard, is it North of, of the thousand number? And you said, Hey, right, we could go create the next coins. There’s donors going out there.

That’s decidedly as a joke. Where do you envision this going five, 10 years out of the future? Is it, will there be more that all have legitimate use cases or will there be some sort of a consolidation just curious on your broad, broad take on that?

Steven Ehrlich: [00:31:28] I mean, I think there will be a consolidation. It’s hard to get an exact count because no one truly knows that I believe there’s about nine or 10,000 cryptocurrencies out here.

But I mean, if you look at the total crypto market cap, new Bitcoin, I think is at the lowest it’s been in a few years and it still makes up somewhere between 57 and 60% of cryptos, total market cap. I mean, it’s market cap by itself, I believe are virtually in dollars right now. And total crypto market cap, depending on.

When this runs, it will be above or very close to 2 trillion. He is probably, I don’t know, 20 or 25% of the total crypto market cap. And then you have several all points. But I mean, if you go past the top 20, the top 20, the top 20 crypto is we’ll probably comprise like 97 and 98% of the total market cap.

So I’m not so most of the other ones will just end up falling by the wayside. I mean, there’s no, like they may not. Like officially go out of business, but they’ll just stop being maintained, no model trade them. No one will want them et cetera. And I do think that users will consolidate around a select few that emerge as sort of category winners via as a store of value as a, as money as a, as a commodity, so on and so forth.

Okay.

Nicholas Olesen: [00:32:44] So what do you, what do you think has driven this huge popularity surge in crypto assets in the last. Six months or 12 months. I think it’s safe to say is, is where this most recent run has been.

Steven Ehrlich: [00:32:58] No, that’s a good question. So there’s, there’s two reasons. One whenever it gets this question, I always refer to a somewhat like less known movie with Dennis Quaid called the rookie baseball.

Okay. There was the same. You probably remember it. Then when he came home with his kids to try out for the Tampa Bay devil rays, after that, he made with this whole team. And and he, he threw a stitches and was ready to go home. And STR came up to him and said something along the lines of, if I call my bosses and say, I want to bring in a 40 year old, I’m going to get laughed at.

But if I don’t call him in 98 mile an hour, hour fastball, I’m going to get fired. And at some point with crypto, it’s the same thing. Like people laugh at it and wonder what it’s truly backed by. I mean, I mean being, I mean, I’m, I’m, I’m not a libertarian by any sense of the word, but I mean, I know that the U S dollar is not backed by anything other than full faith and credit of the United States government, which certainly means something, but it’s not backed by gold.

Like it was a few decades ago, but the idea is like, you can laugh at it and laugh at it. But if the price keeps going up at some point, you want to say, well, like you want to investigate, see what’s going on here and you want to get your piece. And I think that the price rise has been those steady and consistent that it’s forcing even skeptics.

So at least take a look at it. Then, then, then the other, the other part of it. It’s just that financial markets are much more mature than they were back in 2017. When everything crashed back then there was no such thing as, as crypto derivatives, especially in, in regulated venues, which is something really important as you guys both know to the headrest, there were no there were no real professional custodians.

There were no major index providers or reference rate providers and all this type of stuff helps. People feel more comfortable, especially institutions which have really led the surge get more comfortable with buying Bitcoin and to hold the it et cetera, close press from a regulatory perspective, even though we don’t have as Bitcoin ETF yet, which I believe everyone in industry is hoping we might get one later this year.

Because the CFTC, et cetera, has said that it’s not it’s sufficiently decentralized. It doesn’t have to be a it’s not going to be considered a security. There was a bit more of a an okay. From, from, from regulators. The IRS has given out guidance on how to treat Bitcoin and crypto holdings from a tax point of view.

So all those different things are sort of coming together to help make institutions feel a bit more comfortable. And then as the price has gone up, We have come back in as well

Nicholas Olesen: [00:35:39] now. That’s great. That, and that, that makes a lot of sense. And I think that’s, that’s where I sense, but I just, I appreciate your insight knowing the industry as much as he did.

Can you, can you,

Nicholas Ryder: [00:35:48] can you summarize some of those issues? Like what, what has been. The IRR, I guess the SCCs concerns. I know there’ve been applications for a Bitcoin re you know, focused ETF for a number of years, and it seems, you know, it’s, it’s, it seems like we’re getting there. I know that there was a, you know, fidelity, Vanek the number of other firms that have, have live applications the sec, like what what’s, what had been the sec, his main concerns.

And, and what’s your take on, when do you think that might, they might finally green light it.

Steven Ehrlich: [00:36:18] Yeah, it’s, it’s funny. I I actually interviewed Tom Joseph, the the head of fidelity digital assets last week at our this blockchain 50 events that we host for the 50 biggest companies in the world using using blockchain.

And they actually asked them that question, because I think I told them that fidelity does not strike me as a company that would submit an application that they think is going to get rejected for sure. So it’s funny. I actually interviewed a couple weeks ago, Hester Paris, who was one of the five FCC commissioners that she’s actually known in the industry as crypto mom, because she’s dissented on a number of the Bitcoin ETF applications that have gotten rejected.

Okay. And, and and, and she wants to see a big ETF soon. And with Gary Gensler just being sworn in as who actually is, you know, as a friend to the crypto community, he actually taught a course on Bitcoin and blockchain, more on blockchain at MIT. He’s the former CFTC chair. So I think we see him as someone that might be a bit more favorable We’ll see what happens, but regarding your question of why they were rejected.

I mean, the biggest reason I think is just that at this point, most of the commissioners don’t feel that the markets are mature enough to support an ETF. I mean, for instance, when the Winklevoss twins from some Facebook pain payment, the founders of Gemini had had had their application rejected, they basically, the sec basically said that they couldn’t be sure that this markets would be.

Free from fraud and manipulation and some of the reasons for that, or relatively low trading volumes, especially a few years ago when this happened poor information exchanges or information transfers between exchanges and trading hubs, which is important. And then just also. I mean, there’s a lot of allegations and a lot of them are true.

I mean, there’s many exchanges out there that engage in wash trading because they’re not properly regulated. So on and so forth. There’s a lot of, there’s a lot of unknowns. At the same time though, as I kind of alluded to earlier, the markets are maturing. They were, we’re able to see who are the legitimate players.

There are actually very sophisticated crypto forensic firms that can trace and identify. What is illicit activity. If money’s being used for money laundering purposes, so on and so forth, and networks are becoming more security exchanges are becoming more secure. And, and the sec knows this too.

I mean, there are some very, very smart people there. I am. I am sympathetic to some of the concerns that the sec, I actually used to be an intelligence analyst for the department of defense. And it’s one of those. And being a regulator or, or being an intelligence analyst, I think can be thankless jobs because nobody knows what you do, your job well.

And if something happens, they get mad at you for not stopping it. So like, I mean, I understand that, but, but at the same point, there are a lot of people and I think commissioner Paris in particular, I think the sec is going overboard when it comes to this point. And it’s almost for CDs putting them on a, like moving the goalposts when they want for perhaps a different type of asset or commodity.

And her fear is that w w what will end up happening. Is that as opposed to sort of interpreting the rules as they’re written, the sec is almost going to become the de facto arbiter on what constitutes a good investment or not. And that’s not what she wants to happen. She just wants to make sure that when people invest, they’re only exposed to market risks.

Yep. And I think

Nicholas Ryder: [00:39:38] I remember reading an in your interview either, or, or she alluded to just the unintended consequences of delaying an ETF for instance, is that it pushes people out to go do it on their own, through the exchanges where there may or may not be more risks due to the cons. You said that the personal security side of the user error as well, it’s just now you’re forcing people to execute their own transactions rather than be able to get it through the counsel of an advisor or just through a traditional brokerage account.

Steven Ehrlich: [00:40:04] Exactly. Yeah. And, and that’s also something she wants to avoid. I mean, it’s, it’s, it’s getting easier to buy and hold Bitcoin, but it’s scary still. So a lot of people, so, I mean, they, they, they want it, they want an easy way to get exposure and ETF would, would be that. So so that’s exactly right. That is something that she told me when I spoke with her.

Nicholas Olesen: [00:40:24] Perfect. Well, so wrapping up here, just so we don’t, I mean, I feel like we could talk for a few hours on this, but I want to wrap up. And and, and so first, first question is gonna be kind of a sour question, which is what’s the biggest risk in cryptocurrency, just in general for investors or, or this asset class?

Steven Ehrlich: [00:40:40] Yeah, I mean the biggest rest of them, there’s a couple, I mean, price, it remains a very, very volatile asset. So one of the things I always tell people is, do not invest more than you can afford to lose. Because there’s always a non-zero chance that everything will go to zero. I don’t think it’s likely, but it’s not, not impossible.

And then the other, the other big risks are from a security point of view not necessarily with the safe clinic, the network level, but other assets. I mean we always find new bugs there. I mean, it’s impossible to get rid of all security and, and government regulation is, is still a risk. So, I mean, there are some fear, I think Ray Dalio actually that a week or two ago that like there’s a chance, like he thinks that the U S at some point may think about trying to ban it.

I think Turkey band is for payments India and China is abandoned in Nigeria. I mean, China ban trading and, and, and close all exchanges several years ago. And the reason for that is, I mean, governments, like, there’s two things that they. Holding there, dear. The ability to hold guns raise armies and control monetary policy.

And if they think that Bitcoin is getting to be too big, they they may try to intervene. So there are, there are definitely some risks there. Firstly, I think that they are, there are minimal. I mean, I’ve had many conversations with regulators in the U S national and state and local, and I get the sense that they understand the value proposition and.

Because Bitcoin’s narrative has shifted more from a form of money to a type of digital gold. I don’t think it’s likely, but I can’t say it’s possible.

Nicholas Olesen: [00:42:13] And then the last question we’ll end on the fun or that happy note of that, you know, covering this space. Like what, what’s the reason investors who’d never looked at this or never thought about it should, should venture into it or look into this space.

Steven Ehrlich: [00:42:27] Yeah. I mean a few things, one it’s fun. I mean, it really is different things to learn about it. It really has. I mean, I mean, you can probably tell from like some of my voice and I think I talk about this stuff every day. My my, my wife, I drive her crazy, but I have my, my five-year-old daughter talks to me about Bitcoin.

Yeah, exactly. It’s fine. It’s, it’s exciting. And there’s many reasons why people can get into it. And let’s be honest. The reason why I really first got into it was because it was more related to better control over personal data and digital identity. I mean, I, well, first I kids and I realized, like I put the big pictures on Facebook and I realized that Facebook would have like, basically every picture that they’ve ever taken are taken of them for their entire lives.

And that was like, that’s a little bit scary. So some people get into it because they want to have better control over their personal data and identity. Some people have more of an ideological affiliation towards it. Some people just see it as a fun way to invest. One of the big reasons. So I mean, why right now, aside from the price, I aside from the price that I’m seeing, a lot of people think about to look at, it is just because of all the monetary stimulus, the trillions of dollars that have been added to the economy over the last 12 months or so in response to COVID, which I believe was very, very necessary to kind of help keep us Whoa.

There’s expectations that inflation is going to rise. And you just because of the fact that there’s so much money that pasty, once the economy started up again. And the fact that fed chairman palace has said that the fed will tolerate inflation above 2% for a while before they’re going to really try to reign it in.

And the cause of Bitcoin in particular is a hard cap of 21 million units. They see it as a really good inflation hedge. So that’s one reason in particular why I see a lot of people taking a look at it now, Perfect.

Nicholas Olesen: [00:44:18] Now this, this was great. We could definitely talk to you for hours that you, you, me, we could go through the exciting of how, and why’s on a whole lot of different threads here.

Well,

Steven Ehrlich: [00:44:27] w w like I said, I’m moving to Philadelphia in a couple of weeks, so we can always pick it up again,

Nicholas Olesen: [00:44:34] finally in person. We’ll see, but we really appreciate it. Again, there’s going to be links to the, in the show notes for the newsletter to sign up, to read all the stuff you’re putting out some great stuff at Forbes.

So we really appreciate it. And thanks for your time. Right

Steven Ehrlich: [00:44:46] now. Thanks for having me. It was a pleasure.

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