One of the first DS Capital Management’s investments is a crypto-asset, but the review of that specific investment wil have to wait. This post introduces the crypto-currency topic starting with Blockchain technology, then explaining how Bitcoin was the first and largest crypto-currency, and moving on to alternative currencies before our concluding remarks. I’m not assuming readers know almost anything about the topic, so this is addressed at beginners, and in following posts we will dig deeper into one or another currency itself, with a focus on arising investment opportunities in this field.
While many have come to see the term blockchain published, the concept still causes confusion, not least because a basic understand about topic and underlying technology are prerequisite to even grasp why it raises such interest. There are numerous articles out there debating how blockchain will change the world, and many others questioning it’s actual impact on people’s lives, we will try to avoid either extreme and focus on its main features.
On my personal view – influencing this text – as with many new technologies we don’t really know how much this will effectively change the economic and technological landscape, so my goal is simply to understand and explain it as easily to understand as possible, in order to enable a more educated opinion about its potentials and limitations.
Blockchain is in fact a system through which information is organised, immutably stored and in many cases published, following a set of rules established and maintained by the community of users. Some of the key features are the possibility to dispense a system “administrator” once the rules of how blocks are made and who gets to organise them, and the fact the blocks cannot be altered once they go into the chain.
It sounds very theoretical, but think of a system to organise information you know, like a spreadsheet or a database of your place of study or work. Now, consider instead of having an administrator or users with different special access and permissions, you would have a general rule on how to access and edit the database, and once the rules are set, everyone has the possibility to use it equally, and nobody can go in and mess with the result produced by the community. Not a very elegant explanation, but that to me sums up the most relevant pros and cons of the blockchain.
Blockchain is best exemplified by most well-known case, Bitcoin. This virtual currency was originally launched to disintermediate transactions, so instead of a payment going through a bank or large institution, the founding paper proposed to use Bitcoin to make peer-to-peer transactions efficiently and securely, I recommend to all interested in this crypto-currency to read the original Bitcoin manifesto.
Using a clever proof of concept challenge (which we will not explore at this point) simultaneously as a security feature and an incentive to participants who want to receive original Bitcoin, this crypto-currency managed to establish itself as the main crypto-currency and makes headlines around the world on a daily basis. Drawing ever more interested investors, the limited supply of this currency – while the demand surges as more people get interested – has generated intense volatility in Bitcoin prices, and other than hacking of users or trading platforms, the security feature seems to be holding its ground.
The ups-and-downs in Bitcoin price draw interest by investors looking for stratosferical returns in this frontier investment often with stratosferical returns as well as criticism from scepticals who see it as nothing but a piramid-scheme investment, and see its price as a bubble fueled by the hype and about to burst. Personally, I think the fact Bitcoin continually expands and inspires other crypto-assets – ignoring for now forks and other events that might confuse non-specialists – is a sign that there is something fundamentally new and interesting with its concept and technology, even if this currency itself will not fundamentally destroy the business model of the intermediaries it set out to replace, nor see stable price increases over time.
Since the creation of Bitcoin in 2009, many other currencies and tokens have been created, generally called crypto-currencies or crypto-assets. The second most valuable and well known currency out there is Ethereum, which uses a similar logic to Bitcoin but includes the possibility for users to establish smart contracts on its Blockchain. Because of this feature, Ethereum – and its currency Ether – have also gained a lot of ground as the infrastructure for other currencies and tokens to be established, anyone can create their own token or coin!
Now, if on one hand it seems obvious that there is a limit to how much value can be actually created with a new currency or coin, so probably not all of the new crypto-assets created over time will gain relevance, on the other hand the ever-increasing interest in crypto-assets reflects the potential is has to promote change.
Allowing ourselves to imagine blockchain/crypto applications that in my view could make a real difference – if you know any in this category, please let know – is the use to public services more efficient and reliable. Many of the routines civil servants around the world carry manually could easily be programmed into a safe and easy to use blockchain. Why not using a publicly recognised crypto-asset to solve problems such as land registry, maintenance of roads and other types of city infrastructure, or even to manage driver licencing. I’m not proposing current jobs be extinct, but rather the valuable time of the civil servants could be better allocated in making public services better and more reliable to the public.
Moreover, private organisations could use internal crypto-assets or a blockchain to compensate intra-group credits more efficiently than currently. One should consider, however, that at least part of the expected benefit arises given the lack of specific regulation for crypto-assets, which tends to catch up with those who abuse the flexibility of such new mechanisms.
How can this affect me?
So, before I’m confronted with the necessity to buy a crypto-asset to pay for my local public services in real life, why should I learn about crypto-currencies? Well, if you are interested in FinTech like I am, you will know that finance inevitably connects the different markets, and prices in one specific segment unavoidably influences others as they grow. Crypto-currencies are continuously growing despite price volatility, as you can see in their market caps, so if financial value growth happens where new funds are being allocated, then the potential to make money in crypto is a real opportunity.
For usual readers, you will know that I’m not supportive of easy-money pursuit, so I’m definitely not recommending to allocate a large part of your portfolio to an unknown crypto-asset hoping it will make you rich, but rather think FinTech enthusiasts should not ignore this important trend. No one should be taken by surprise if the best crypto-coins continue to gain ground in the mainstream financial world and even help push – even if not disrupt – one or another market in a more technological and community-driven direction.