Though it has been a while since
my last blog post, I have been constantly thinking of ideas, and interesting
topics to write about. In my conversations with colleagues, clients, and
investment acquaintance it has become obvious to me that the investment du jour
is Bit Coin. There seems to be an endless fascination with crypto currencies
(specifically Bitcoin) and the thirst for the "next one" to explode
in "value" as Bitcoin has. It has been incredibly interesting to
witness the rise of this currency from birth in 2008, to mild prominence in
2013 when Gold was soaring to right now, as the crypto currency hit an all-time
high above $7000. All the while I have struggled to understand the currency as
an investment vehicle. My traditional understanding of investment vehicles does
not extend to the realm of currencies with no physical assets, or government
backing. There seems to be no fundamental way of valuing these crypto
currencies which lead me to believe that these are vehicles of immense
speculation.
That realization begs these
questions;
- Can a strictly speculative
vehicle be overvalued?
- What is the proper valuation
for this vehicle?
- What should this instrument be
valued based on?
- If I come up with future
economic value for these, what discount rate is appropriate?
- Ultimately, is there a way to
enjoy in long term non-speculative gains from crypto currencies?
It was the last question that
lead me to think more about the foundation of crypto currencies, and dig a bit
more into what underlies Bitcoin and her sisters, and how I as a
non-speculative investor (these days) can enjoy the fruits of this fad.
In the off chance that you
haven't heard about BitCoin or the technology that underlies the Crypto
Currency, here's a link to two quick 2 min. YouTube videos discussing the coin
and the technology and some of its merits.
Bitcoin -
https://www.youtube.com/watch?v=ZT26y_l-jtI
Blockchain -
https://www.youtube.com/watch?v=r43LhSUUGTQ
Admittedly, the video simplifies
the technology significantly, but I think it gets the idea across. Better still
is the article linked below, It details the implementation of blockchain
technology and puts it in a different light, one in which as an investor, you
might be interested in understanding.
https://hbr.org/2017/01/the-truth-about-blockchain
In short:
Blockchain is a
"foundational technology" as opposed to a disruptive one, meaning the
effects of blockchain will not hit all at once or quickly, rather it will cause
a fundamental change in the way business is conducted over a long period of
time (maybe decades). The technology is analogous to TCP/IP the infrastructure
of the internet as we know it today; specifically, understanding that
blockchain is essentially a system of ledgers that keep transactions transparent
and accurate thus eliminating the need for a middle man, and that TCP/IP is
essentially a system of transferring packets of data without an intermediary -
"The parallels between blockchain and
TCP/IP are clear. Just as e-mail enabled bilateral messaging, bitcoin enables
bilateral financial transactions. The development and maintenance of blockchain
is open, distributed, and shared—just like TCP/IP’s... TCP/IP unlocked new
economic value by dramatically lowering the cost of connections. Similarly, blockchain
could dramatically reduce the cost of transactions. It has the potential to
become the system of record for all transactions. If that happens, the economy
will once again undergo a radical shift, as new, blockchain-based sources of
influence and control emerge. "
Ultimately, the adaptation of
blockchain is projeted to be slow, and varied. The current attraction to
crypto-currency is akin to the initial fascination with e-mail when the
internet was formed. The thinking is that blockchain is to crypto currency as the
internet was to e-mail.
In essence, it is much harder
than I thought, if not impossible, to find a mature publicly traded (investment
worthy) company dedicated to blockchain technology, because it's more of an
infrastructure than a business model. Nevertheless, I am now convinced more
than ever that this technology has transformative properties, and we might be
at the cusp of something similar to the internet revolution, along with the ups
and downs of the first one in the late 90's and early 2000's.
What do you think?
