ShapeShift’s Erik Voorhees on How the Best Regulation for Bitcoin Is Just Math

What initially got you hooked on cryptocurrencies?

I got involved in May of 2011. and I got hooked because I had lived through the financial crisis just a couple of years before. I was very interested in how money worked and how banks works and how central banking worked.

I wanted for the world a way that they could have a money that didn’t require the government or banks behind it, but I had no idea how that could happen. Gold was maybe an alternative, but not highly practical.

I was depressed about that. And then, when I learned about Bitcoin, after an hour of reading about it, I was completely hooked. I was like, “Wow, this actually can do it.” This allows people to send money anywhere in the world without anyone being able to stop them. No government is involved whatsoever. Can’t be shut down. This is great. And I’ve been down the rabbit hole ever since.

There’s not that many of us [that have been in the space for nine years]. Even in 2011, people that were getting involved felt like they had missed the boat. Whenever someone gets involved in Bitcoin, it’s always easy to say, “Ah man, I wish I was involved a year or two earlier.” 

But 2011 was pretty early. This was back when the only Bitcoin wallet really was running a full node on your computer, and the wallet file wasn’t even encrypted, so it was just storing your private key on your computer in plain text. That was a Bitcoin wallet. The blockchain in total was about two gigabytes.  It was a different world, but it is still running just as well as ever and it’s been almost a decade.

Whenever someone gets involved in Bitcoin, it’s always easy to say, “Ah man, I wish I was involved a year or two earlier.” 

Has the way you thought about Bitcoin in 2011, and the way you think about it now, changed significantly?

The main difference is that it’s much more certain now. I was always a very idealistic believer that it would take over the world. Back in 2011, that was a very, very strange and fringy thing to believe. It’s still fringy today, but it’s much more plausible: Bitcoin’s far more likely to actually take over the world today than it was then. 

But also back then, we were really interested in Bitcoin for payments, and thinking that that would be the leading way this would gain traction, people paying merchants online for goods and services as a money. There was a lot of attention in those early days on merchant services and on teaching people about Bitcoin so they could buy things with Bitcoin from the merchant.

That was one thing we got wrong about how its adoption curve would happen. I still think it will be widely used in payments, but that’ll perhaps be the end of the tail, not the beginning.

That has grown a little bit. There is definitely economic activity like that, but it was not the leading theme. Most people that have Bitcoin are not using it to spend day-to-day. And despite that, it has still grown and it’s still become a big thing. That was one thing we got wrong about how its adoption curve would happen. I still think it will be widely used in payments, but that’ll perhaps be the end of the tail, not the beginning.

Has this global pandemic and economic fallout highlighted any ways that Bitcoin is working really well, or perhaps not working out as intended? Some people thought Bitcoin was a safe haven, but others have said that its price falls early on means that’s no longer the case.

First of all, it’s far too early to cast any judgments on how Bitcoin is performing in this crisis. It’s basically been in crisis for just three weeks or so [interview conducted April 3], at least in the U.S.. I’m very curious how Bitcoin will perform over the next twelve months. 

Six or twelve months from now, we can assess whether it was a good safe haven or not. It has amazingly been no less stable than the S&P 500. That’s wild. I mean, for this little tiny nascent asset that most people in the world have never heard of or used to be as stable as the S&P 500. I think that’s very notable. 

Even though it had a huge, horrific crash and everything was falling apart, it’s still up year-over-year by 20 or 30 percent. The S&P is way down year-over-year. It depends on your timeframe here, but Bitcoin has been fairly resilient. All things considered — it’s up. 

It’s a highly speculative asset, so it’s not surprising that a bunch of it got sold off during a panic. But the question is how quickly does it come back, how do people use it, and to what extent do people turn to it as they see increasing problems with the normal financial system? That’s going to be a medium term thing that plays out over the next twelve months.

I’ve heard that the Bitcoin sell-off was mainly due to institutional investors selling, while retail investors, the little guys, were holding and even buying.

I don’t really have much visibility into that. I’ve heard little anecdotal reports there. It’s always a complicated thing, it’s always some portion of every group, and that portion is hard to determine, as often people will be in different buckets. A retail person might have sold on the first day, but bought back on the second. It’s just very nuanced and difficult.

What’s a really common myth or misconception that you often run into about Bitcoin?

I think a popular misconception is that Bitcoin is controlled by any group. Basically, the myth is that people take a person or a group that has influence and they mistake that for control. 

People like to ascribe control because I think it makes them feel a little more like they understand how it works.

One of the main places this manifests itself is in the mining industry. A bunch of miners are currently in China, everyone knows that. People make this myth that Bitcoin mining is controlled by China. The reason that’s a myth is because that’s just where miners currently are — they don’t control mining. If all mining in China shut down tomorrow, the mining would migrate, move to other places in the world. It’s a fluid thing. No one controls that, even though lots of people have influence on it. 

It’s an important thing to understand, because this is one of Bitcoin’s most important properties: that no person or group controls it. That’s a myth I would like to see it go away, but it’s just hard for people to really understand what decentralization means. People like to ascribe control because I think it makes them feel a little more like they understand how it works.

How simply you can explain how Bitcoin works to a newcomer?

I did this a ton back in 2011. Basically, Bitcoin is a ledger that records who owns what.

This ledger is replicated across lots of different computers all over the world, and all of these ledgers stay in sync through the internet. They’re all updating each other whenever a transaction occurs from Bob to Alice. That’s really all it is.

All of it’s just this ledger, and it says Bob has a Bitcoin and then Bob sends it to Alice, Alice has it, and the whole ledger updates itself. No one, no particular points in that ledger is critical. Any any point can drop out or add on and the things stays in sync with itself. No one can turn it off. As long as you follow the rules of the system, you can participate in it. 

Bitcoin is a ledger that records who owns what.

That’s really all you need to understand what Bitcoin is. Anything more technical than that is an interesting detail, but not not necessary for understanding it.

That’s a really solid explanation. I usually tell people Bitcoin is like an Excel document, but everyone has one…I need to work on my explanations.

That’s helpful because it helps people understand this ledger concept. I think it’s very similar to riding a bicycle. The best way for someone to understand it is to just use it. If you tried to explain to someone what a bicycle was or what it did or how it worked, you’d get into some technical complexities pretty quickly. It would sound very weird, how in the world does a thing with just two wheels stay upright? It doesn’t seem possible. You could get into a long debate with someone about what that is and how it works, or you could just show them by riding around on a bicycle.

The best way for someone to understand it is to just use it.

In a similar way, the best way to explain Bitcoin is often to just send them ten dollars of Bitcoin, and they’ll open up [their wallet] the next day and see that it’s worth ten dollars and 20 cents. They’ll suddenly be hooked. Their mind will be open and they’ll learn about it. That usage is really important.