Episode 515: A Bet Over Bitcoin : Planet Money A big-time venture capitalist thinks bitcoin will change the world. A prominent writer thinks bitcoin is going to disappear. On today's show, they make a long-term bet on bitcoin's future.

Episode 515: A Bet Over Bitcoin

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The other week, we did a show about a famous economic wager from the 1980s. It was between these two guys, Julian Simon and Paul Ehrlich, and it was a bet over one of the big questions of the day. What were the effects of population growth going to be? And doing that show made me kind of sad that there weren't more bets on the big issues that we face. Bets, as one economist puts it, are a tax on bullshit.

If you believe something, if you have some prediction, don't be vague, don't write about it in some clever way that doesn't actually say anything specific. If you really believe something, make a prediction, write it down and bet on it publically with someone who disagrees.


And then, David, just as you were complaining that there aren't more big public bets about the questions of our day, I saw this tweet from Felix Salmon, who writes about finance for Reuters. Here's what it said. It said, oh, B. Horowitz is offering a Simon-Ehrlich-style bet with me over bitcoin. Imma (ph) think about this one, but in principle, yes.

KESTENBAUM: That's imma think about this one - I-M-M-A. So B. Horowitz in that is Ben Horowitz, a big-time venture capitalist. His firm was an investor in Facebook and Twitter, among other companies. And now his firm is betting on bitcoin, this new digital currency that is going to radically transform the way the world buys all kinds of stuff.


KESTENBAUM: Yeah, or not. Felix thinks not.

GOLDSTEIN: Anyway, I saw that tweet and I tweeted back at Felix and at Ben and I said, hey, why don't you guys come on PLANET MONEY, hash out your bet here, and we'll be your bookie?

KESTENBAUM: And they said, OK. Hello and welcome PLANET MONEY. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Today on the show, two very smart, very successful people with totally opposite views agreed to bet on a big question. What are we going to use for money in the future?


JANELLE MONAE: (Singing) Baby, whether you're high or low. Baby, whether you're high or low, you got to tip on the tightrope. Now let me see you do the tightrope.

KESTENBAUM: So the way this all happened is that Felix published an essay arguing that bitcoin was doomed. And Ben, the VC guy, read the article and disagreed. He starts commenting on the article and then he issues this challenge.

BEN HOROWITZ: And so I said, well, why don't we just bet?

GOLDSTEIN: And you said that in public, right?


GOLDSTEIN: You challenged Felix to a bet.

HOROWITZ: Well, and I've read enough of Felix's stuff to know that would be absolutely irresistible to him. So...

FELIX SALMON: (Laughter) He's right about that. So, of course, being challenged to a bet by Ben Horowitz is kind of the high point of my career. And so I immediately said yes.

GOLDSTEIN: Just a quick reminder - bitcoin is this new virtual currency. You can think of it as cash for the internet. It doesn't exist in the physical world. It's not widely accepted, but you can today use it to buy some actual stuff online.

KESTENBAUM: Ben thinks bitcoins are going to be really big. His venture capital firm has invested about $50 million in bitcoin-related startups. Felix, as we said, is pretty sure bitcoins are doomed. Though, he admits he's been wrong on that before.

SALMON: About 2011, I first started looking to bitcoin thinking this is a bit crazy. And eventually when it reached the dizzy heights of $200 per coin, I published this article saying this is ridiculous. It's a bubble. It's all going to crash. And I was absolutely right. And it was ridiculous, and it was a bubble and it did crash, and it went back down to about $5 a coin. And I was vindicated. And that was the end of that, except for it wasn't because then it went up to a thousand.

GOLDSTEIN: A thousand dollars a bitcoin. But Felix is still convinced he's right. He still thinks bitcoins are doomed.

KESTENBAUM: Before we get to the actual hashing out of the bet itself, we asked Felix and Ben to just talk a little bit about why they differ and to outline their cases. Here's Ben.

HOROWITZ: It's a very interesting discussion because one of the things about the bitcoin discussion is it's one of the few that involves experts in economics and then experts in computer science. And a lot of the differences come from the differences in background. So if you approach bitcoin from a computer science standpoint, you tend to be very bullish. If you approach it from an economic standpoint, you tend to be very bearish. And so...

KESTENBAUM: And you're sort of from the computer science side of things?

HOROWITZ: I'm from the computer science side for sure.

SALMON: And to Ben's point, the computer scientists - at least the ones in Silicon Valley where Ben lives - tend towards the techno-utopian, anarcho-libertarian end of the spectrum. They like - they think that technology is going to save the world. It's what Evgeny Morozov calls solutionism (ph).

HOROWITZ: Yes, that's solutionism. I live in the world of solutionism, no doubt.

KESTENBAUM: Ben, why do you think bitcoin does have a bright future?

HOROWITZ: Yeah. So it's, you know, it's a real computer science breakthrough. So this is a problem that we've been trying to solve in computer science since the early '80s. Which is how do you prevent the double spending problem?

KESTENBAUM: How do you make sure it's only in one place at one time?


KESTENBAUM: One of the problems with trying to make digital money is that, like, if you have a movie online, everyone can copy it and it can be in a hundred different place at once. Money that can not happen with - right? - you have to - has to exist in just...

HOROWITZ: That would be a bad problem, yes. That would pretty much defeat the money.


KESTENBAUM: And so that was the breakthrough, basically - someone figured out how to do that.

HOROWITZ: Exactly, exactly.

KESTENBAUM: So that's one reason Ben likes bitcoins. You can't make extra copies of them. There's no way to counterfeit them, no way for bad people to use the same bitcoin to buy two different things at once or 20 different things at once. It makes online cash possible.

GOLDSTEIN: And, Ben says, there's another reason he likes bitcoin. The way we buy stuff online now, which basically is using credit and debit cards. It's pretty convenient for consumers, but it's a problem for a lot of the businesses that sell stuff online.

HOROWITZ: You have to pay a very high fee to accept money on the internet, 2.5 to 3.5 percent.

GOLDSTEIN: And what you're talking about here, you're just talking about accepting Visa, accepting American Express, right?

HOROWITZ: Yes, exactly.

GOLDSTEIN: This is just credit and debit cards come with what is really a pretty high fee, about 2 percent, which for a lot of businesses is a big chunk of their profit or what would be their profit.

HOROWITZ: Yes. If you look at overstock.com, which just started accepting bitcoin, one of the interesting things about it is their margins are very low. They're, you know, they're operating on like a 5 to 10 percent margin. So 2.5 percent is a huge chunk of the profits. So their bitcoin transactions are significantly more profitable.

GOLDSTEIN: Also, Horowitz says, credit card companies reject some perfectly legitimate customers because they get flagged as potential frauds.

HOROWITZ: As a merchant, you end up rejecting approximately 8 to 10 percent of your good customers due to potential fraud. And then, you know, in many, you know, Netflix I think only accepts kind of customers from 40 countries because of this sort of credit card problem. And then merchants in, like, Kazakhstan, like, they're just done. Like, there's no way that they can be online.

KESTENBAUM: So that's Ben's case. And to some extent, Felix actually agrees with him. He says the current way of paying for stuff online is a big problem. He just does not think bitcoin is the solution.

GOLDSTEIN: One of the biggest of those problems is it's actually kind of counterintuitive. Felix says the fact that bitcoins have become so valuable so fast means nobody's going to want to spend bitcoins to buy stuff. Instead, people will just buy bitcoins and hold on to them.

SALMON: I'm skeptical about bitcoin in particular partly because it is a store of speculative value. It's a place where speculators like the Winklevoss twins will come in and buy up lots of bitcoins for no reason other than the idea that they think they can find a greater fool to sell the bitcoins to tomorrow.

KESTENBAUM: In fact, Felix points out, the way the bitcoin system was designed - the way the computer code was written - only a finite number of bitcoins can ever exist. And that fact alone, he says, means they're likely to get more and more valuable over time.

SALMON: And because bitcoin offers the potential for so much profit just by sitting on it and because it's an inherently deflationary currency, which means that the longer you don't spend it, the more you benefit, then everyone has an incentive to not spend their bitcoins. And you can't have an effective payments mechanism if you're not spending the currency.

GOLDSTEIN: Ben, why would people spend them?

HOROWITZ: Well, bitcoin's gone up so fast now. I'm assuming that it won't go up as fast at, you know, quite the rate that it has in the past as it gets to be pervasive. The price is going to reach equilibriums. It's not just going to go straight up.

GOLDSTEIN: So just to recap, Ben and Felix have very different opinions of bitcoin. Ben thinks it's going to completely change the way the world buys stuff online. Felix thinks it is going to disappear.

KESTENBAUM: And now for the fun part - the bet.

GOLDSTEIN: So we're going to have a bet. In any bet there's basically three things about it. There's some duration. You're going to bet for some amount of time. There's some set of terms. You're going to figure out what to bet on. And then there are stakes. You figure out how much to bet. And so first, let's just talk about duration. What kind of timeframe are we talking about here?

HOROWITZ: So I think it makes sense, you know, in the kind of 5 to 7-year timeframe because it is a big thing to upgrade the payment infrastructure of the internet, you know, if not the world.

KESTENBAUM: Felix, are you OK with a 5-year timeframe?

SALMON: Absolutely. There's no way that bitcoin is going to be a common payment mechanism in five year's time.

KESTENBAUM: (Laughter).

SALMON: It will probably not even exist. It's just going to be a sort of vague memory.

KESTENBAUM: (Laughter).

SALMON: But in any case, it's not going to be used as part of the deep architecture of payment.

KESTENBAUM: All right. You guys do disagree?

HOROWITZ: Yes. We have a fundamental disagreement. That's what makes a bet so excellent.

KESTENBAUM: OK. So we got a time frame. Next question, what to bet on? And this was kind of tricky. They didn't just want to bet on the price of a bitcoin in dollars. That could just be the result of people speculating. They wanted to bet on whether people were actually using bitcoins to buy stuff. So they figured they'd pick a retailer and they'd bet on what fraction of that company's sales were done in bitcoin.

GOLDSTEIN: But they went through this list of different retailers arguing over which one to pick. And frankly, we were worried that even if they did agree on a retailer, we might not be able to know in five years what share of that retailer's business was actually done in bitcoin.

KESTENBAUM: And, Jacob, we'd thought about this problem. And we thought we'd found a solution. So we proposed this to them. If you want to see if people are really using bitcoins, here's what we'll do. We'll do a poll. PLANET MONEY will set it up. We'll ask a statistically significant sample of Americans a simple question - have you used bitcoin to buy something in the past? Whatever time period you want.

SALMON: I like this. I like this a lot. Let's take a representative poll of people and ask them this question. Have you used bitcoin to pay for goods in the past - yeah, I think month. A month is good. We could say a week, but let's say a month because I want to be generous to Ben here. What number, Ben? What percentage of people are going to say yes in five year's time to that question? Let's say 25 percent. What do you say to that?

HOROWITZ: I would say that, like, that seems a little higher than both. I would predict and then...

GOLDSTEIN: Come back at him, Ben.

HOROWITZ: I was thinking more in the, like, if 5 to 10 percent of the people who made payments used bitcoin, like, that's a lot of payments.

SALMON: Well, it depends how much they use. Because if you only used it once a month...

HOROWITZ: (Laughter) But you're saying it's going to disappear.

SALMON: To be frank, I think that the answer to who has won this bet is going to be blindingly obvious by the time we get to five years from now.

HOROWITZ: I think so, yeah. I hope so.

SALMON: The niceties of trying to work out, oh, have we managed to get to 10 percent or 25 percent or anything like that, we're not going to even need to run the poll. It's going to be obvious who's won.

GOLDSTEIN: So, Felix, if it's going to be blindingly obvious, the low end of Ben's range was 5 percent. Right? Is that right, Ben? You said 5 to 10 percent.

SALMON: If you make it past week, I'll do it - 5 percent. Past month I want 10 percent.

KESTENBAUM: I thought you just said it was going to be blindingly obvious?

SALMON: I think it is, but I'm negotiating a bet here. I'm not going to...

HOROWITZ: (Laughter) Wages in bitcoin.

SALMON: Your choice of 5 percent in the past week or 10 percent in the past month.

HOROWITZ: All right, well, let's go 10 percent last month.


KESTENBAUM: All right. So we have the terms of a bet. Five years from now, we're going to do a poll of a representative sample of people living in the United States. We will ask them the following question - within the past month, have you bought anything with bitcoins? And if greater than 10 percent of those people say yes then, Ben, you win.


KESTENBAUM: If less than 10 percent say yes, then Felix wins. What if exactly 10 percent say yes?

HOROWITZ: If exactly 10 percent say yes, then clearly I've won.


SALMON: Push goes to Ben.

KESTENBAUM: You both agree to that?

HOROWITZ: Yeah. Well, sure.



GOLDSTEIN: OK. So we got the terms. What are the stakes? What are you guys going to bet?

HOROWITZ: Well, I think we should bet in bitcoin. But I think that I would like my payment in bitcoin.

SALMON: The problem with betting in bitcoin is that I'm utterly unhedged on this, if you win.



SALMON: Like, there's no way I'm going to be able to afford to pay out on this bet.

HOROWITZ: Unless you buy bitcoin now.

SALMON: At whatever it is, like, $900 a bitcoin or something. Yeah, no.


KESTENBAUM: Also, Felix, if you turn out to be right and bitcoins are worth nothing - you win nothing (laughter).

SALMON: I win nothing, exactly. I really don't like this idea.

HOROWITZ: Right. So Felix is guaranteed to lose if it's in bitcoin. OK.

KESTENBAUM: Well, what was like the first big item to be sold for bitcoin? Everyone always talks about these alpaca...

SALMON: Wasn't it socks?

KESTENBAUM: Why don't you bet a pair of alpaca socks?

SALMON: I think a fine pair of alpaca socks is something I do not have and could probably use from time to time.

HOROWITZ: I will frame them and hang them in my office.

SALMON: Alpaca socks it is. Of course you do realize, Ben, that part of the reason why I'm going to win this bet is exactly that everyone who bought alpaca socks with bitcoin two years ago is kicking their warm feet right now, saying I wish I hadn't bought those alpaca socks. I wish I just held on to the bitcoin because I would now be a millionaire.

GOLDSTEIN: Because they're basically wearing thousand-dollar alpaca socks that they bought...

SALMON: Or million-dollar alpaca socks.

GOLDSTEIN: So one last thing. Will you guys both agree to come back on our show, hopefully graciously and talk with us five years from now in 2019?

HOROWITZ: Oh, yeah. Looking forward to it.

SALMON: Absolutely.

KESTENBAUM: Felix, if you lose, how are you going to feel?

SALMON: I have lost more than my fair share of bets over time. And frankly, I'll be happy - I think - because I hate the current payment system. The current payment system is broken in a million ways. And I would love something frictionless and global. I would love to be able to pay money anywhere in the world really easily in a way that anyone else anywhere in the world could accept really easily. It would - the world would be a much better place if I lose this bet.

KESTENBAUM: Ben, how would you feel if you lose?

HOROWITZ: Well, it depends. I will either feel extremely sad if nothing has changed, or I will feel fine if some cryptocurrency has taken hold and solved the problems that bitcoin aims to solve.

SALMON: You're going to feel extremely sad. My base case is absolutely that nothing is going to change.

GOLDSTEIN: All right. Thank you guys for stepping up and making a bet instead of just talking about what's going to happen.

HOROWITZ: All right, good.

SALMON: I'm looking forward to some warm feet.

HOROWITZ: (Laughter).


MONAE: (Singing) You can't get too high. We can't get too high. I said you can't get too low. We can't get too low. 'Cause you get too high. You can't get too high. No, you'll surely be low. No, you'll surely be low. 1, 2, 3!

KESTENBAUM: Hey, Jacob. Here, I'm sending you a calendar invite for January, 2019.

GOLDSTEIN: I'm in. In the meantime, we will put links to Felix's column that started this whole thing going, as well as to a piece that Ben's colleague wrote in The New York Times about bitcoin. We'll post those on our blog at npr.org/money.

KESTENBAUM: If you want to let us know which side of the bet you would take, you can send us email - planetmoney@npr.org. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

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