The Heat The phenomenon of Bitcoin

Just one digital coin is currently worth nearly $18,000, and that has many people around the world eager to invest in cryptocurrency. We'll explore the phenomenon behind Bitcoin. Hello, I'm Arlan Naidu, and this is The Heat. Bitcoin was created 8 years ago, and at the onset it was worth pennies. But over the last year, the price started to soar, peaking for a brief time as high as $18,000. Some analysts believe Bitcoin could go as high as $100,000 before crashing to zero, effectively becoming worthless. The investment frenzy includes reports of people taking out second mortgages to invest their retirement and homes being sold only in Bitcoin. There are plenty of skeptics, including billionaire Warren Buffett, who call the currency basically a mirage. And Jamie Dimon, the CEO of financial powerhouse JPMorgan Chase, thinks it's a fraud.

I could care less what Bitcoin trades for, how it trades, why it trades, who trades it. If you're stupid enough to buy, you'll pay the price for it one day. I've also told people that it can trade at $100,000 before it trades to zero. Tulip bulbs traded for $75,000, something like that. The only value of a Bitcoin is what the other guy will pay for it. And I think, honestly, I think there's a good chance that Bitcoin— a lot of the buyers out there, up there jazzing up every day so that maybe you'll buy it too.

So is Bitcoin the equivalent of buying a lottery ticket? Let's bring in our panel to find out. Here with us in the studio is Sarawan Hatipolu. He's the CEO of Business Environment Risk Intelligence and CGTN's global economics analyst. From Western Connecticut, we're joined by Peter Schiff. He's the CEO and chief global strategist of Euro Pacific Capital. Also with us is Peter Van Valkenburg. He's the director of research at Coin Center, a nonprofit cryptocurrency research and advocacy organization here in Washington, D.C. And from Boston, Robert Siciliano is a security analyst with Hotspot Shield and an expert on cybercrime. Thanks to all of you for being with us. So I'm gonna start with the with you and the inevitable question: what exactly is Bitcoin?

Very good one. It's not a physical— it's not physical money. Bitcoin, the idea of it was actually developed in 2008 as a digital payment. So the coin concept came later on. And in any digital cash or digital payment system, you need a network of payments to kind of keep track of what is being spent, the accounts, balances, and so on and so forth. This is a decentralized system. So to prevent the system to be abused, a cryptocurrency concept was introduced. And that cryptocurrency is pretty much a limited data entry in a ledger that keeps these accounts. So a lot of people are saying, well, we don't know where it is, we don't know how we can access to, so we don't trust it. But Anand, look what happened in 2007 with the crisis that built up, right? We had all our monies in banks. In investments in mortgage-backed securities, and it was all gone all of a sudden. So people just don't understand, but this was a reaction to that 2008 crisis, how everything has developed. And at the end, people said, you know what, I think we're going to be trusting in math, in algorithms, rather than people themselves. This is pretty much what New York Stock Exchange had two centuries ago. A couple of brokerage— brokers came there and said, look, we don't trust each other, we need to set up some rules. And they did. And that same thing is happening with the Bitcoin market.

Yeah, but what backs it? What gives it value?

Well, it gives value because first of all, there's a soaring demand. Demand always gives value to any kind of asset, right? We're seeing this in Asia quite a bit. And the reason that we're seeing it recently, starting from March, April, I would say, is because Japan, the parliament in Japan passed a legislation making that legal tender. At the end of September, Financial Services Committee provided 11 licenses for Bitcoin exchanges. So that, that's pretty big recognition. And Japan actually is ahead of the curve here. They're recognizing it. This is something that they have to deal with. At the same time, if you look at from the investor's point of view, look, CME, CBOE, getting all kinds of recognition. NASDAQ is next. So there are also arbitrage opportunities because the futures are going to be settled in US dollars, not Bitcoin. So the prices will be different. Investors are going to come in and take advantage of it.

Peter Schiff, as I understand it, there are only a certain number of bitcoins that are in circulation right now. If I wanted to buy one, where would I go? What would I do?

Well, I wouldn't encourage you to do that, but there are plenty of online exchanges where you can go to buy bitcoin. But yes, there is an artificial scarcity there because they can only mine— and I use the word mine in quotes because they use mining to try to create value that doesn't exist by by using terminology associated with gold. But you could— since you can only mine 21 million of them, that's the limit. But of course, there's no limit to how many competing digital currencies that have no value at all, just like Bitcoin, can be created. In fact, Bitcoin has already forked twice. They have Bitcoin Cash and they have Bitcoin Gold, and there's 21 million of those. And there's an unlimited number of forks that can come off of the Bitcoin network. So the only value in the cryptocurrency now is the fact that it's going up and people are buying it because they believe they'll be able to sell it to somebody else who also thinks it's going to keep going up because he can buy it. He can sell to somebody else who has the same outlook. But as soon as the currency really starts to decline, it's going to implode and eventually it will go down to its true value. And Jamie Dimon is right. And I don't often agree with Jamie Dimon. But in this case I do. I think the ultimate value is going to be zero. And I do think that the idea was born out of the frustration from 2008. You know, I was one of the people who predicted that crisis, who was short the subprime market, and I understood the problems with the fiat monetary system. And a lot of the people, the early adopters of Bitcoin, understood the problems with fiat money, with the dollar, with the euro, with the yen, with all the quantitative easing and 0% and negative interest rates. But the problem was these cryptocurrencies are— have more in common with fiat than people believe. These are fiat cryptocurrencies. What people really should be doing if they're worried about the dollar or the euro or the yen is they should be buying gold. They should be buying a real alternative.

Who's fiat?

That is real, honest money. Excuse me?

Who's fiat? Fiat means that somebody gives this thing value.

No. No, fiat— well, fiat just means let it be by decree.

It means this is money by fiat, and I'm the government and I'm making this money. So who is doing that with Bitcoin?

No, no, but the, the, the backing of fiat currency comes just from faith, right? It's just confidence that it's always going to have value, right? That's what Bitcoin has in common with fiat. It doesn't, it doesn't matter. There's no, there's no intrinsic value to the Bitcoin. All money previous to governments creating paper money, all money was a commodity first and then a medium of exchange second.

As the old— says that Bitcoin is a commodity to use as money. That's a good sign.

But it's a commodity that has no value. It has no use.

I think commodities are valued at what the market values them at. Gold is valued at what the gold traders value it at.

Okay, Peter, let me cut in.

But because there are things you can do with gold and people have valued gold for thousands of years.

What percentage of the value of gold trading on commodities exchanges is actually from use as jewelry or in medicine or in science.

Okay, Peter van Valkenburgh, let's talk about Bitcoin for a moment here. As Peter Schiff pointed out, there are competing cryptocurrencies, 1,300 of them right now. Why has Bitcoin caught the public imagination?

Well, it is the original, so the white paper that explains the fundamental technology innovation that allows the system to work, that allows people over the internet without legal agreement, without prior arrangement, without knowing each other or having a lawyer between them come to an agreement over a ledger of transactions, a ledger of transactions dealing with only 21 million of these scarce units. And yes, they're artificially created in that it's just a ledger that describes them, but there's no person who keeps that ledger. There's no actual issuer. And what maintains that value, what allows us to have faith in that record of scarcity and peer-to-peer value transfers is purely software., and that was developed back in 2008 and 2009, so it was very much the original. It solved a fundamental problem in computer science called the double spending problem, wherein most digital things can be endlessly reproduced at no cost, so they don't have scarce value. But Bitcoin found a way to solve that by keeping this peer-to-peer ledger. But this—

okay, one moment there, Robert. I want to get— sorry, one moment there, Peter.

The value of the network means nothing.

The follow-on cryptocurrencies that Peter is referencing are things Peter and Peter, it gets confusing— are things that people have made in imitation of the original of Bitcoin, or because they think they can improve upon the technology. It's a permissionless open environment. It's like the internet in the 1990s. And while a lot of people were deeply skeptical about the internet in the 1990s, there were all sorts of people building all sorts of different business models. Now some of them ended up like Pets.com. They bought bad Super Bowl ads with sock puppets and they went away, and the only reason they got funded was because of irrational exuberance at the time. But some of the companies back then, in the late '90s, they are now the major companies in the top 5 best capitalized companies in the world.

One moment, one moment, Peter.

It's not a company, it's not the internet.

I want to get to Robert. Robert, let me get your view on this. How safe is Bitcoin?

Well, I guess that's relative. So consider your online banking. You use a username and a password to access your bank account that is hosted by, say, a large American or international bank. If that username and password is compromised, then money can be liquidated out of your bank account. Now, in— here in the US and most countries, that money is backed by insurance. And governments, and they will refund those fees, mostly for private accounts, whereas if it's a business account, you may be liable. That said, with Bitcoin, if your username and password is compromised, generally you will not see that money. There's no insurance, there's no backing. If you host or hold that wallet on your own, then you're out of luck.

Saurabh, when you say you own a Bitcoin, what do you actually own?

Well, you do own value, right? I mean, this is a store of value right now, but it is also going to be a medium of exchange.

It's not a store of value.

We're talking about insurance. 5, 6 years.

May I say, where was the insurance that the government offered in 2008 when millions of people lost their homes, when millions of people lost their investments? Where was the regulator then? Where was the government? Right? This is a response from people. We want to be safer. And yes, absolutely, there are risks. Look, it has moved away from its intrinsic value. This has become a bubble. It's not tulip mania, by the way. I'm so upset Jamie said that. But it is going to lose value. Tulip mania was in 1636. It lasted less than a year, first of all. So just time-wise, it's an insult to Bitcoin to compare it to that. This has been going on for a decade. Second thing is that there was ownership. People owned tulips. Here there's no bulb. In cryptocurrency there's absolutely no bulb.

Sarah, there are people— people in very high places— who are very critical of Bitcoin. I want you to take a listen to what Janet Yellen, the chairman of the Federal Reserve, had to say. Let's watch this.

Bitcoin at this time plays a very small role in the payment system. It is not a stable source of store of value and it doesn't constitute legal tender. It is a highly speculative asset.

So let me ask you this first. Is she right? Is it speculation?

It is speculation, but she's not right. She's talking about something what the Federal Reserve and the regulators missed. It was the same thing. CDOs were not that big of a deal. Mortgage-backed securities were not that big of a deal. Where were the regulators? Why couldn't they catch that? So I think that's a bad example. I like Janet Yellen, but I think she kind of talk too much there about Bitcoin in that way. But it's speculative.

It's absolutely speculative. I can't find fault with anything that Janet Yellen said there. I mean, it is not a stable store of value. And she said stable, not just store of value. It's very volatile, but it can be a store of value. Now the question is whether it's stable. And as to whether it's a large-scale mechanism for payments or whether it has a meaningful impact on the US payments system, No, it's still small. $250 billion in total market capitalization, i.e., the amount of money that's been pumped into the system as a whole, is a drop in the bucket in the global economic sense. And that's because this is raw new technology, and it's very promising, but it's still in its infancy.

OK, go ahead, Peter.

If you even try to use it for payments— because I remember initially when people talked about it, they said it was great for micropayments. If you want to buy a cup of coffee, you can pay for it. In Bitcoin. Well, it's impossible. You know, it costs, I don't know, $30, $40, $50 just to do a transaction. So you can't buy something for $1 or $2 or $5 or even $100 because, you know, the cost of doing it is such a high percentage. It's much cheaper just to use a MasterCard or Visa. It's 2 or 3%. So you can't use it as a medium of exchange. And people that are living in a lot of the poorer countries where a lot of people think, oh, it's ideal for people in these poor countries that have really irresponsible central banks. Although they're all reckless and irresponsible, but, but some are more so than others. But the annual incomes are so low that there's no way these people can afford to use Bitcoin. I mean, people are just using it now for pure speculation. I was watching on CNBC today, you know, they had some kid that dropped out of high school that's now a multimillionaire because he happened to buy some Bitcoins, and they now they're treating him like he's some kind of financial genius. You know, but this is all popular delusions and the madness of crowds. Yeah, you could find all kinds of crazy reasons to rationalize why the price is going up, but it's going up for one reason only, and that's because people are buying it. They have to make up reasons to justify the activity, but eventually it's going to crash. That's how bubbles work. I've seen it before.

Can I get to Robert? Robert, you work with cybercrime. Among the criticisms we've heard of Bitcoin is that it's It's a cryptocurrency that's loved by criminals. Why do criminals like this?

It is, um, well, easy to anonymously exchange, uh, in Bitcoin. Uh, there's no central regulation, uh, so no one really is paying attention. Uh, there are, you know, minimal ways to track, uh, who's exchanging. So, uh, it's a very effective way to launder currency.

I'm sorry, I have to challenge that statement.

I'll give you a chance in a moment. Go ahead, Robert.

So right here in the US, in response to the imminent challenge, a woman actually has been caught who had been taking out a number of loans here in the US and fraudulently opened up a number of different credit cards and ultimately turned all of that cash into Bitcoin and had sent that overseas to ISIS.

Actually, she did not send the Bitcoin overseas. That's just flat untrue, and I would not want that repeated on television.

Okay. Go ahead, Robert Siciliano.

The prosecutors have alleged, and if they're right, then I hope she is prosecuted to the fullest extent of the law for it, that she bought Bitcoin with fraudulent credit cards. And then rather than sending Bitcoin overseas, that she converted it back into dollars and then tried to use multiple wires, international shell companies and cash, as in cash in a briefcase, to move it to ISIS. In other words, as a system for moving value across borders, that was not useful for her in this particular case. She turned to the legacy system and the world of shell companies, which is Mossack Fonseca, the main way to launder money in order to move money.

All right, Robert, just one moment, Peter. One moment. Peter Schiff, just one moment. Robert, just respond to that, and then I have a question on the back of that as well. Just go ahead.

So, you know, whether that's the case or not, it's still in litigation. In the end, you know, it has been used by criminals worldwide to transfer funds. And, you know, that goes on with everyday cash. And that does not make Bitcoin bad. It just seems to be an effective way for criminals to get paid for ransomware and other non-traceable —cryptocurrencies.

Now, the non-traceable is the other thing I wanted to address, because we've talked about the fundamental innovation as to how this thing works. It works because there's a ledger. And not only is that ledger traceable, it's with perfect fidelity, and there's only one version of it. There's not a bunch of records kept by 5 different international correspondent banks that don't record beneficial ownership for the shell companies that open accounts. There's one ledger. It's called the blockchain. And if you know that someone received a payment at an address on that blockchain, you see with perfect fidelity every transaction into and out of that address. And this is exactly the kind of technological tool that law enforcement has used to apprehend the people who have used these networks for bad purposes, like Ross Ulbricht, the guy who created the Silk Road. He was caught with his laptop in front of him. They opened it up. They found the public address that he was receiving payments from the Silk Road drug market at. That's unimpeachable evidence that he benefited from every single atomistic transaction for drugs or heroin that happened on that website. And that evidence was presented in a court of law, and he is now in jail.

And they burned Charlie Shrem after that.

Okay. Which I don't think he was involved, but— So, what happens— now you've got this anonymous cryptocurrency, Bitcoin. What happens when you cash that out into dollars? Doesn't that alert central banks or banks that there's real currency here?

Well, yeah, you can do that, and there is real currency, and people are— but they're not doing it yet, Anna. That's the issue. I think still Bitcoin is in the infancy. This is going to be a huge demand issue, and we're seeing it. Look, CME, CBOE accepted it already. That's recognition. NASDAQ is next. That's recognition.

Yeah, and one quick point. Recognition aside, when you use an exchange in order to convert Bitcoin into dollars, you're using a company like Coinbase or GDAX, their exchange product. They are licensed or registered money services businesses. They do know your customer, suspicious activity reporting. They have a risk-calibrated anti-money laundering program. So if you try and cash out of the system, get away from that immutable record, They're going to collect information about you there. This is not a good tool for criminals. Yeah, let me, let me say—

Go ahead. Let me say a point here. You know, these futures contracts, you know, when I first heard about Bitcoin years ago and people were buying it, one of the things they were telling me they liked about it was that it didn't have any futures contracts. They said, you know, we don't like gold because it can be manipulated. They have futures contracts. And so we want to buy bitcoins because there are no futures contracts. Now I'm hearing, oh, buy Bitcoin because there's futures contracts. You know, it's everything about the original, what people liked about it is changing, especially with criminals, because initially criminals were attracted to it because they believed it was anonymous. And now I've heard situations where criminals were caught precisely because they used Bitcoin. It's almost like a digital fingerprint. And as I think the governments are going to crack down more and follow this, then I think eventually criminals are going to walk away from it. And that was its only real value.

So Peter's claim is that we keep changing our story.

Store value, it's no good.

As to why it's valuable, and what I have to challenge in that question is, who do you mean we keep changing our story? There is no Bitcoin company. There is no Bitcoin marketing organization. There are people all over the world who are using open source software to build a connected network of computers to achieve a result. It's rather like the early internet. There were people all over the world connecting their computers. They were getting their newspapers from them. They were getting their email from them. And people laughed at those people. They said, you're using a ridiculous You're using something that's never going to have value. You're changing your story every day. It's for porn. It's not for porn. It's for online banking. But eventually we figured it out and now we all use the internet.

I'm going to go around the table. Saurabh, you first. I am probably one of the people who are buying Bitcoin and believe they're going to get rich.

Fascinating, fascinating discussion. But we're focused on Bitcoin. Yeah. Why are we not focused on cryptocurrency? Look, Bitcoin was about, what, 80-some percent of the cryptocurrency in 2017. That's right. Right now it's about 55. There's competition coming in, so it could be the Napster of everything.

That's really possible. Yeah, right.

So we need to understand that. So it could just go crash to zero, but the cryptocurrency market is here to stay.

Fundamental—

the sooner you accept it, the better it will be.

Okay, Robert, can— if you get a cryptocurrency backed by gold, if you have, you know, instead of a fiat cryptocurrency, then it could work. You have— but you have— it has to be— No, no, no, that defeats the entire purpose.

The purpose is not to rely on somebody's faith and credit, not to rely on somebody to have the gold in a warehouse, but rather to rely on an open network of computers to record verified information.

I just want to go to Robert. Robert, can governments declare this illegal?

I think it's out of their hands at this point. I think at best Of course they could. They could— well, I suppose, and how?

So, my background is law. I'm a lawyer. I work in Washington, D.C. at a nonprofit. If you want to talk about government policy, it's what we do day to day in the last 3 years that we've been operating. And what I can say is there's no appetite for that. People always think there's this monolithic government that's fighting this monolithic technology and that they're at odds. In reality, government is just people. People. And we go into congressional offices and we go into regulatory agencies. We find people who are curious, who want questions answered. We find people who are excited and actually would love to be able to buy some if ethics rules didn't perhaps prohibit them from doing so. Okay.

At the same time, there's a— this is—

all they do is they crack down on— One moment, Peter.

One moment. —and require more—

An international financial structure is threatened by it. Look what Jamie Dimon is saying. For him to say this is a fraud—

We don't actually see any lobbying against So we always thought that when we filed comments in, say, a CFTC regulatory proceeding, and this is our perspective, we think the futures are a good idea. Maybe they just don't believe it doesn't have legs. That's possible that they don't take it seriously, but we've never run up against somebody submitting comments or lobbying in favor of the banks to shut this thing down. That kind of brinksmanship, that kind of battle is not happening. And by and large, this is a regulated technology. As I said, the exchanges are regulated as money services businesses. The futures markets are now regulated as swap execution facilities, and it can be traded in derivatives contracts. In addition, you have consumer protection regulation. Every state in this country has been coming to the proposition that maybe they regulate these things like money transmission. So you have to get a license to do it in California. You have to get a license to do it.

That's the point I was getting at.

When people have to supply—

What about the regulation of of currency moving across borders. Wouldn't governments want to be involved in that? Wouldn't governments want to know where that money is going?

Well, at a minimum, the exchanges themselves need to beef up their security, or many of them should. And if they are either self-regulated or regulated by governments, they have more incentive or they're pressured to do so.

And they are regulated. And so the exchanges in general, I think, are doing a very good job, especially the U.S.-based ones, at having good cybersecurity. Security programs and risk-calibrated anti-money laundering programs. Peter, go ahead. Peter Schiff.

Yeah, you know, when you have to deal with all of the KYC, you know, the anti-money laundering, know your customer, when you have to present your Social Security number, you know, a passport, a utility bill, when the IRS is issuing 1099s every time somebody sells a Bitcoin, when you have all this complication, all this regulation that drives up the cost even further, you've destroyed the original basis for the appeal of the currency. Which is it? It's used by criminals or it's too regulated?

I don't understand. It's not regulated or it is regulated? It's— it's— everything is bad. They have the regulation.

When they have the regulation, it's going to make it more expensive to use it. It's—

and no, but they have the regulation now and people are using it now.

No, it's right now they're using it as a speculative asset because they think it's going up. That's fine.

If it's digital gold, that's fine. You know, people were buying gold in the '90s. It's like, hey, speculation.

I want to ask Peter Schiff then, what is the bond bubble that we're in, global bonds, that are $11 trillion out of them yielding negative returns on investors?

This is not a bubble? Look, we have a lot of bubbles. But the bond— look, it's the nature of economies around the world that it kept pumping. We have central banks creating money out of thin air all around the world. We have bubbles in bonds, we have bubbles in stocks, we have bubbles in real estate. I'm not arguing that, but we also have a bubble in cryptocurrencies. That's one of the bubbles that I think central banks have created. And the reason I think the central banks created the—

Peter, what I would say is you should be glad that there's a new asset that's uncorrelated with existing economic systems and maybe can be a good hedge against other bubbles. Yes, that's great. That's an excellent thing. It's a bubble. Yeah, when things get too correlated, Peter, we get things like 2008.

I just got a couple of minutes left. Sorry, I want to ask you this. Would you— one moment, Peter— for a lot of these other bubbles, right? Would you advise people to invest in bitcoins? I wouldn't, right at this point.

I wouldn't. I completely disagree with Peter though. Yes, it is a bubble and it is going to lose a lot of value, but it's going to pick up in 5 to 10 years. The price will be higher than where it is now. But could it go to $5,000, $6,000 because of the soaring demand that created this bubble? The answer is absolutely yes. And again, I'm going to bring it back to competition. There are other cryptocurrencies. Bitcoin can lose a lot of value, but the market is here to stay. And I think Wall Street needs to understand that.

So when you say it's going to go down, will it stabilize at some point? Absolutely. And what will— why will it stabilize at some point?

Because there's going to be demand. Continuous demand, and we're seeing this. How do you know? Look at— well, we're seeing it. Look at all the countries that are using it. You mentioned that the countries that are too poor to use it, if you look at the Bloomberg data, actually those are the countries who suffered from inflation. Zimbabwe, Venezuela, Turkey is up there, the 6th highest country using this.

Yeah, they're inflating cryptocurrency.

So the demand is here to stay, but—

Cryptocurrencies are inflating like crazy.

All right, we're going to have to leave it there, gentlemen. Thanks to all of you for being with us. Could continue. That is it, though, for this edition of The Heat. I'm Arno Ndondo in Washington, D.C. Thanks for being with us.