Demystifying Bitcoin
Arthur Salzer
Founder & CEO, Northland Wealth Management
With a 30+ year professional career, Arthur C. Salzer is one of North America's leading family office experts is the founder and driving force behind Northland Wealth. Arthur was farm-raised in Southern Ontario before obtaining his Economics Degree from McMaster University at the age of 20. Arthur is a former member of the Think Growth Campaign Committee for the Canadian Chamber of Commerce tax review. For the past four years, Arthur has been a judge for the prestigious Family Enterprise of the Year Award (FEYA). Since 2016, Arthur has been known for his unique insights into alternative investing and family offices in his Column - Curve Appeal which appears in each edition of The Financial Post Magazine.
Arthur is frequently interviewed by leading media sources such as Bloomberg, Reuters, NBC, Financial Post, Globe & Mail, Washington Times, Wealth Professional Magazine, CTV and CBC for market analysis and commentary and is a frequent speaker at leading family office and investment conferences across North America and Europe.
Wealth Professional Magazine has featured Arthur as the Top Ranked Advisor in Canada along with twice being recognized in its Hot List as one of the Canada’s leading wealth management executives. Arthur has been awarded Portfolio Manager of the Year, Multi-Service Advisor of the Year and is a two-time winner of Advisor of the Year - Alternative Investments.
Under Arthur’s leadership, Northland Wealth has been recognized 3 times as the Best Multi-Family Office in Canada at the Family Wealth Report Awards, and as the Best Multi-Family Office < $2.5B at the 2019 Family Wealth Report Awards and the Best Multi-Family Office <$10B at the 2020 and 2021 Private Asset Manager Awards.
A graduate of McMaster University (B.A. Econ.), he also holds the designation of Chartered Financial Analyst.
Cindy Radu
Welcome to the Tamarind Learning podcast. I'm your host Cindy Radu, Chief Learning Officer for Tamarind Learning Canada. Today we are going to be talking about Bitcoin with our guest, Arthur Salzer. Arthur is an extraordinarily thoughtful advisor, no doubt in part as he was raised on a farm in southwestern Ontario. Arthur was only 20 when he obtained his economics degree from McMaster University. He is also a Certified Investment Manager and a Certified Financial Analyst and his professional career spans over 30 years. Notably, Arthur is a founder, a CEO, and driving force behind Northland Wealth, which is a multifamily office based in Toronto, Canada. And under Arthur's leadership, Northland Wealth has been recognized for an impressive six best multifamily office awards across a variety of categories. In addition to his multifamily office experience, Wealth Professional Magazine has listed Arthur as the top-ranked advisor in Canada and has recognized him twice in its hot list as one of Canada's leading wealth management executives. Arthur has also been awarded Portfolio Manager of the Year, Multi-Service Advisor of the Year, and Advisor of the Year in the Alternative Investments category.
Cindy Radu
Twice, Arthur shares his unique insights into alternative investing in family offices in his column curve appeal, which you can find in every edition of the Financial Post magazine. He's a frequent speaker at leading family offices and investment conferences across North America and Europe, and he is also frequently interviewed for his market analysis and commentary by leading media sources. Arthur, I have to say that I find our topic today somewhat daunting and I'm not generally easily daunted. So it would be great if we can start with some basics. But before we do that, I just want to say welcome today and thank you again very much for being here to talk to us about Bitcoin.
Arthur Salzer
No, no, thank you so very much as well. Cindy. I know Bitcoin is a hot topic, but really what we should be looking at is what is money and what the history of money is. That's really the place to start. And for many millennia, humanities used things like gold and silver and obviously coins during the age of the Roman Empire and then into England. And one of the challenges of using coins all that time, even though they were actually made with silver or gold, was that they were debased. And what does that mean? Well, the ridges that you see on quarters, both in Canada and the United States, those were some of the first devices used on coins in the Roman Empire. And it was a way to show that the edges weren't filed off and you were receiving the full amount of weight of the gold or the silver that the coin was created with. So it's been a long-standing problem. When the settlers, the pilgrims came over to Canada and the United States, there was a huge problem where there wasn't sufficient coins being sent over from Europe. And what the settlers did was they looked at what the First Nations people were using as money.
Arthur Salzer
And in this case, they were using a certain type of seashell, and it was strong on wire or thread, and it was wampum. And that quickly became the currency of the settlers to North America. They adapted the money that the First Nations people were using. The challenge that occurred over time was the Western Europeans found ways to dig up significantly more shells and to flood the market in North America with wampum, significantly devaluing what it was worth. Similar things have happened in history. When the Europeans first went into Africa and they saw that glass beads were being used as a form of money, at the time, the Europeans could manufacture synthetic glass and they flooded Africa with glass beads and devalued the money. And today, everybody's. We've been growing up with fiat currencies, really for the past 50 to 75 years, and they've become the de facto standard. And what we've seen historically with fiat currencies, which means backed by the fiat of the state, by decree after the First World War, when Germany was forced to pay war reparations, they simply printed Deutsche marks and flooded the markets with devalued currency. The same things happened in Cuba, the same things happened in Venezuela, and similar things are happening today here in Europe and in North America as well.
Arthur Salzer
And trying to solve that problem of a currency getting debased was really a 40-year project before Bitcoin was released to the world back in 2009 as the white paper from nom de plume, an anonymous person or group of people called Satoshi Nakamoto. And it was released on the 31 October '09 just during the crisis, pardon me, I should say '08 during the crisis. Now, that 40-year experiment what they were working on is everything. And it really starts at what money is. And again, we've had this debasement problem with a digital currency. It has the ability to account for every single piece of currency that was ever minted or created or mined. And Bitcoin as a money, a digital money, everyone that utilizes and downloads the blockchain, which is basically a database of every transaction from the time that Bitcoin was created to where the person or the entity received in the wallet, you can see every single transaction. And really, from an accounting standpoint, that has turned double-entry accounting on its head. Double entry accounting we've had now for probably five to 600 years. It was created by the Chinese. And Cindy, if you sold me something, I in turn would give you something else, usually some form of money, and you would record a debit and a credit, and so would I.
Arthur Salzer
And both you and I, the two parties of that transaction, would know that transaction occurred. And what makes the Bitcoin blockchain different is that everyone, if they wish, gets a copy of those accounting records. So you see it? I see it. And whoever wants to look at the books, they get to see it as well. And really, it's three-sided accounting. And that never existed until the Bitcoin blockchain was created and launched in really '09.
Cindy Radu
So that sounds a little bit scary to me, Arthur, in terms of transparency. So can you just give us some assurance as to why that shouldn't be scary?
Arthur Salzer
Well, again, it's the opposite of scary. When in the Roman Empire days, if I was receiving a coin from yourself and you had filed off the edges, or you received a coin that had been modified in turn, when you gave it to me, I was receiving less than full value, or vice versa. If I was giving you money. And this is the first time where any person, any participant, can verify the money is true and sound. And through the mining process of Bitcoin, we know, and anybody can actually look at the underlying code and protocol, that there will only be 21 million Bitcoins produced. And for example, about two months ago in May, the US government had a debt ceiling crisis, and the two parties needed to negotiate in order to allow the debt ceiling to be increased. It always will be increased, but there's some brinksmanship that goes on. The amount of new debt that has been added to the US federal debt levels is almost $1.5 trillion since May, since the debt ceiling was increased, nobody at the time would have thought that that's the amount $1.5 trillion is two times the tarp bailout plan during the great financial crisis.
Arthur Salzer
So within two months, two and a half months, we've got two x of the entire bailout package. That was done 15 years ago. Right. That's astronomical. Which means money is getting devalued, and it's getting devalued faster and faster and faster. And Bitcoin, given the way it's been created, is the only asset in the world that cannot be devalued. And originally, there was a precursor to Bitcoin. It was called Bitgold. And gold for a long time, for many, many millennia, thousands of years, has been some form of currency around the world. But as the value of gold increased, more people would go and try to mine and find gold and in turn, bring more supply onto the market. So even something as great as gold still has an increasing supply, and it's not certain how much new supply can be brought on.
Cindy Radu
So can you just tell me this number you mentioned of 21 million? So why 21 million, and where did that number come from? And why is that never going to increase?
Arthur Salzer
It's funny, it wasn't a hard number to pick. It's not like blackjack, where you say it's a 21 combo. But originally, when you look at the Bitcoin protocol, when the mining process occurs, when Satoshi first started mining in January 2009, after he released the white paper, the reward system is that your computer tries to solve what's called a hash equation that really was influenced by email. So when email was first created 40 years ago, 45 years ago, it was very easy to spam a lot of different people or a lot of different computers. And in order to slow that down, there was created a hash protocol that your computer would have to solve, a random number generated variable. And when it solved it, it was then allowed to send the email. So it's easy to do ten, it's easy to do 100, it's much more difficult to do 1000, and to try to do 100,000 or a million, it's even more difficult. So part of the Bitcoin protocol, in order to receive a block reward or have Bitcoin mined, there's a hash equation performed. And the original name of the Bitcoin blockchain was actually a time chain.
Arthur Salzer
So it was designed that Bitcoin would be mined and rewarded every 10 minutes using one standard home computer at the time, if you had two computers added to the network, the network would do a difficulty adjustment every two weeks so that Bitcoin wouldn't be mined too quickly. And it would become progressively more difficult to mine that Bitcoin. And if you had ten times, then it's ten to the x squared, and it becomes more and more challenging to mine it. So that protocol, when you measure that reward process, and it was 50 Bitcoin originally, every 10 minutes for four years. And after a four year period, basically, to align itself, which is sort of funny, with the US presidential election, the Bitcoin reward drops by 50%. So instead of getting 50 Bitcoin for solving the equation, you would get 25. And similarly, four years after that, you would receive twelve and a half, and then six and a quarter, then three and an 8th. And that declining supply, when you add it all up as an equation, you get to 21 million. So it's simple high school math from grade eleven, grade twelve, to get that number, it wasn't picked. It's just, that's the number that's resolved. Now, what people don't really understand is that Bitcoin is divisible by one 100 million. So you can end up with very small portion ownership of Bitcoin. You don't need to buy a full token. It's like pennies, but even smaller.
Cindy Radu
So that sounds like. And I've heard that Bitcoin uses a lot of energy. So all this computing stuff that's going on in the background is that using a lot of energy, it's using lots.
Arthur Salzer
And lots of energy. And a lot of people complain that they think it's too much energy, but it uses a very small fraction of the current energy that's used by Visa and Mastercard and the banking system today. It's a fraction of that. So it's much, much less. But what that energy does is it provides protection to the Bitcoin network. If you want to get control of the next group of transactions, the next block of transactions that are recorded, you would need to control 50 plus 1% of all the Bitcoin miners in the world today and put enough electricity through them in order to change the next group of accounting transactions. Similarly, if you wanted to unwind transactions, that happened 10 minutes ago, 20 minutes ago, 30 minutes ago, the amount of energy and mining machines required to unwind that blockchain is so astronomically high that it's basically impossible to do so. That security is providing absolute settlement. When a transaction is done, there is no going to a third party and saying, I want you to change the transaction. Once it's done, it's done, it's full settlement and it's guaranteed. And that's one of the things about Bitcoin that people don't quite understand.
Arthur Salzer
It is final settlement, but it's also censorship-proof. And if you want to go buy Bitcoin, and you're five years old, right, and you can operate a cell phone on a smartphone today, you can literally download a wallet to your phone and receive Bitcoin from your grandparents, your mother, your father, some kid at a kindergarten if you're in grade five. And you don't need to be an accredited investor, you don't need to be a qualified purchaser, and all of a sudden, anybody of any means of wealth, of cultural background, of any religion, of any belief, has the ability to transact and not have to worry about some governing body, some government saying that they cannot do that. And in the Western world, I mean, we don't have too many challenges in our banking system. But if you live in a place like Venezuela, if you live in Cuba, if you live in North Korea, those governments cannot censor a Bitcoin transaction. As long as there's Internet available, that transaction can occur. And similarly, if the end-user protects their seed words, basically their password, to operate their wallet, a government cannot seize those assets, and it's the first asset in the history of mankind that cannot be seized by other individuals.
Arthur Salzer
So you've got something that's censorship resistant, can be used by all, and cannot be stolen from you, regardless of the amount of force used. So that's really a game changer from a freedom perspective. And I think you're seeing some of the adaptation go on globally because of those features.
Cindy Radu
Interesting. So you've used this term Bitcoin mining a few times, and I think it would be helpful just to explain a bit about what that means, and especially in the context of what you've just explained, because it sounds like people are out there looking for Bitcoin randomly. Can you just share a bit more about that concept?
Arthur Salzer
Absolutely. Again, when Bitcoin was first created and launched to the world in early 2009, Satoshi was the first miner. So whoever that person was or group of people, they ran a home PC they downloaded. They had a copy of the Bitcoin blockchain on there, as well as the protocol. And their computer would solve a hash equation in the same very similar process to sending an email. And it was designed with significant difficulty that it would take 10 minutes for a home computer to solve that hash equation. The miners today are specialized machines that their entire purpose, their entire function, is to solve hash equations and to do it quickly. So you want very inexpensive power, and you want a lot of mining machines. So the more power that you can put through your machines, the more machines you have at a low cost, the probability of you solving the hash equation first and receiving the Bitcoin from that current block that's getting capped plus or minus every 10 minutes. And that cheap electricity really makes it interesting as well. So one of the challenges, and one of the reasons countries are wealthy, for instance, why is North America wealthy?
Arthur Salzer
It's because we can extract resource energy and transport it around the world. We can sell it or we can utilize it. Same with Europe. Why does Russia have a high degree of wealth? Because they've got natural gas. Middle East, same thing. China, they've got coal. You look at places like Central America or Africa or South America, and you say, well, they're not as wealthy. Well, why is that? They have lots of resources, but they cannot necessarily move them out of the country, certainly not easily. If you use wind or solar or geothermal, it's very difficult to build hydroelectric transmission lines. To move that electricity very far distances, you get too much loss of power through heat. Now, if you use that energy to mine Bitcoin, you now have something that's a digital storage of that energy and then can be moved anywhere around the world, again, censorship-resistant, or it can be kept as a store of value. So what you're seeing is areas of stranded energy, and that could be even natural gas. In Alberta, for instance, there's a lot of time. Natural gas is flared as a byproduct of oil extraction, and you're simply wasting the energy and flaring.
Arthur Salzer
It is not as environmentally friendly. It's not fully combusted. Whereas if you put a generator on that well and you combusted it more thoroughly, you could put proper scrubbers and everything else on there if you want to mine Bitcoin from that and then move that energy digitally around the world. So it really is a way to move energy and to do it in a digital format. So what you're seeing are countries like El Salvador taking the geothermal that they have from their volcanoes. They've borrowed money to create volcano bonds, and they're building out their electricity grid so that there's more power to the people. They can start to use things like air conditioning, which makes people more productive at night or during hot weather. It allows them to do more manufacturing. But in the times that that extra electricity isn't being used, that extra electricity can be through an offtake agreement, can be used to mine Bitcoin. So all of a sudden, they're getting a stronger power base. That's being done by theoretically clean means. You're not changing the environment in any way. Volcanoes are there, there's lots of heat, but now they're utilizing it to a much fuller degree. And that really makes it quite interesting.
Cindy Radu
Okay, go ahead. Let's take this to day-to-day life in North America. So Cindy's sitting at her computer, and she wants to buy something or make an investment. So just kind of walk me through. Let's say it's my first time. I'm just sitting here at my computer. What would be the steps that I would need to go to?
Arthur Salzer
The easiest method, and probably what a lot of people do is they would go to an online exchange, they would open an account, and they would bring in currency, whether it's US dollars, Canadian dollars, what have you, into that account, and they would use the exchange to buy Bitcoin. However, that's not necessarily what's needed. You could simply download a wallet to your phone. It takes about 15, 20 seconds to do through the Apple store in the stores that you use for Android. And another person that has a wallet could scan your phone, just like you would do a transaction at a cashier and transfer Bitcoin to you. That's simple. So it's a very easy way to move a store of value around.
Cindy Radu
So do you see this becoming kind of the way of the future in terms of going to buy something at a store or restaurant to be paying with Bitcoin or we are ways away from that?
Arthur Salzer
Yes and no. One of the challenges of the Bitcoin network is it can do roughly seven transactions a second. And you know, that's fine here in Burlington. You could not wait too, too long. But when you look at all of the global transactions going on, the numbers are staggering. The speed simply isn't there. So what's been created are secondary layers to Bitcoin, called the Lightning network. And the ability of the lightning network to transact right now is somewhere in the neighborhood of 20 to 30,000 times faster than Mastercard or Visa. So you don't necessarily need all the security, all the greatness of Bitcoin. You can settle to the Bitcoin blockchain once an hour, once a day for small transactions, and instead run this other layer above it. And you're seeing companies now out of the. They've actually, some of them have moved to El Salvador, where Bitcoin is legal tender and the firm is called strike. They use the secondary layer, called lightning, and you can literally use US dollars or Canadian dollars, whatever you want. Go to a store in Mexico, pay in pesos, and it settles instantaneously. And the FX charges are minimal. The vendor isn't paying 4% service charges to the banking system, nor are they waiting two weeks for settlement.
Arthur Salzer
So you're starting to see that change go on. And it's being done through, really through private enterprise. The challenge that's going on is governments and central banks are looking at the technology that Bitcoin created, and they're looking at the speed of the secondary networks. And what they don't like about it is they can't control it. So just like paper money, lots of people do deals with paper money, but that's being pushed away very quickly. Governments want full digital transactions only. They don't want people to settle in cash. And when you look at what goes on in places like China, if you don't behave the way a government demands that you behave, your banking is frozen, you cannot transact, you can't buy food, you can't get on a bus, you can't fly, you can't travel. And today in China, 35% of the population doesn't have the social credit score to leave their hometown. So it is being used as a weapon. And that's, I think, one of the worries of many that see these central bank digital currencies that are trying to emulate Bitcoin. But instead of having a fully distributed network that no one person or entity can control, these would have databases that are controlled by the government, and they would have the final ability to make the decision whether a transaction clears or not. So it has created the technology for governments to monitor every transaction.
Cindy Radu
Interesting. So I'm sure we could talk about this for another hour or so or more. I do want to just. You mentioned the word blockchain, and again, there's so much terminology in this space. So can you just quickly describe what blockchain is? Quickly.
Arthur Salzer
Originally, blockchain was going to be called a time chain. That was the original name that Satoshi came up with, but it got changed to blockchain. So again, during the mining process, there would be transactions going on. People would be transacting Bitcoin back and forth between themselves. And once the Bitcoin reward was found through mining, that would cap a block and those transactions would be stored in it. So, similarly, think of it as a small insect stored in a piece of amber. And you can see it, it's trapped in that moment of time, and that's all it is. And unless you break the amber, that insect is preserved there. Now, what we haven't really spoken of is Bitcoin versus everything else. And the challenge of the rest of crypto is that everything outside of Bitcoin, for the most part, I'd say 99.9%, is really a company. And Bitcoin is a commodity. Everything else in the crypto world is a company. There's a board of directors, there's a founder. They generate revenue, they've got a PNL model, they've got all the funding risks that you would see in a venture capital program, except you don't have shareholder rights.
Arthur Salzer
So the rest of crypto is something that very, you know if people love risky investments, if they're not risk averse, it's something that they can look at. But really, if you're risk averse, you want to start with Bitcoin first and to look at it now as a firm. We actually started investing in Bitcoin in spring of 2019 for our families, and we did pretty much 2000 hours of due diligence before we made the investment. The first hundred hours was, why not to invest in it? Why not to add it to a portfolio? And once we talked to enough participants in the Bitcoin ecosystem, and some of the participants were like, fidelity digital, we spent time with them. We spent time with the owners of the New York Stock Exchange, Ice. We talked to companies backed by TD Bank, and they were all building the infrastructure, the pipelines, to have the traditional money move back and forth to the Bitcoin ecosystem. So once we understood that it wasn't a fraud, it wasn't a Ponzi scheme, what happens when you add it to a portfolio? And if it's done correctly and rebalanced, you can actually potentially add return to a portfolio and reduce risk.
Arthur Salzer
And that is the mantra of any professional investment manager around, is how do you improve return and reduce risk? But by adding volatile assets, so called risky assets that move in price, you can improve portfolio performance, has to be done in moderation. But it is something that can make a lot of sense.
Cindy Radu
So definitely something families should be talking to people like you about to see if that makes sense for them and their investment portfolio.
Arthur Salzer
It sounds like, well, yes, and given that a lot of wealthy families have long-term horizons, Bitcoin, over the past decade has been the top-performing asset class in the world. Nothing has performed anything anywhere close to it. So for those investors that do have decade-long horizons, the chance of a good return and hedging the debasement of currency that's going on in the world today definitely makes a lot of sense.
Cindy Radu
Arthur, this has been absolutely fascinating, a great background, and I really appreciate that. And there's so much more to learn. So I imagine many people who are listening to this podcast will be interested to find out a bit more about the topic. Where can you recommend some resources that they can learn more about? Bitcoin and blockchain and all the stuff we've talked about today.
Arthur Salzer
Probably the best book to go to is called The Bitcoin Standard. It's written by a friend of mine, Dr. Saifedean Ammous. I think it's in, I don't know, ten or twelve or fifteen different languages. It's probably even free nowadays. So that's the first place to have a quick read of what it is. And again, I'm not suggesting go out and buy this. It's a great investment. This is a groundbreaking technology that mankind has never seen, and to not be exposed to it, to look at it seriously, you're missing out on something even. It's not necessarily to invest, but to understand how it works goes a long way to understanding and making you a better investor in other asset classes, I think.
Cindy Radu
Great comments, Arthur, thank you so much. I know you've provided me with some additional resources as well, so we'll make sure that those links are available through our podcast. Are there one or two key takeaways that you'd like to leave with us today?
Arthur Salzer
First thing is do your own research. That's incredibly important. This still is a nascent asset class, so getting a comfort level and understanding it before looking at it as an investment is important. Time is not of the essence. A good investment is a good investment for years and decades. So it's nothing that needs to be done today and figure it out later. That's the beginning of a bad investment. So that's the two pieces of advice.
Cindy Radu
Awesome, Arthur, thank you so very much for your time and sharing your wisdom today. Hopefully we'll have you back and dig into some of these other topics in more depth later on.
Arthur Salzer
Thank you so much, Cindy. Take care.
Recommended Articles/Books
- "Why Now May be the Time to Invest in Bitcoin" from Northlandwealth.com
- "The Process of Adding Cryptocurrencies to Northland's Asset Allocation" from Northlandwealth.com
- "Why Bitcoin Should be Part of a Balanced Portfolio" from Northlandwealth.com
- "Why Bitcoin is Outperforming Crypto" from Northlandwealth.com
- "Shelling Out: The Origins of Money" from Satoshi Nakamoto Institute
- The Fiat Standard by Saifedean Anmous
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