While still in my prime as a chess player , I recall my chess coach emphasis on a skill that had to be perfected, it was a skill that he called prognostication, which he taught in tandem with a skill of patience. What I didn’t know then was that, the skill of prognostication has a place in investment finance industry, with a known chess expert Lev Albert teaching the same to investment honchos at the Wallstreet for 2 decades now, and being a well kept secret in Wallstreet. I find this skill particularly important in underpinning the predicament we are in as far as the discussion around Bitcoin is evolving.
As of this writing in mid-December 2017, the total market capitalization of crypto currencies hovers around $220B (Last week the Bitcoin rate surged beyond the $17K mark. Initial coin offerings (ICOs) have exploded in popularity, closing on $3B+ in funding in 2017 alone. Huge corporations like Wal-Mart and Pfizer — have completed successful blockchain pilots. Exchanges were hacked. Locally, a BTC trading forum organized an event on Crypto Currency trading at hotel opposite Jevanjee Gardens and the tickets to the event were completely sold out. Amidst this frenzy of euphoria, the media fuelling speculation, governments starting to pay particular attention to the phenomenon, with Japan being the latest country to introduce a crypto currency, this article will offer simple definitions and analogies for block- chain technology. It will also highlight both sides of the divide, the protagonist side of Bitcoin investment and the naysayers.
According to its original whitepaper, Bitcoin was a “peer-to-peer electronic cash system.” It would allow for online payments [to move] from one party to another without going through a financial institution.” The founder of Bitcoin reserved 1million Bitcoin for himself. From the finite number of 21m that’s 5% ownership. The USA owns 4.6% of the world wide Gold Reserves. That means with the analogy that Bitcoin is the Digital Gold, Satochi will own more coins than the US owns Gold. To understand the value of Bitcoin, imagine the world moving to a place where everyone uses unforgeable cryptographic currencies instead of money (regulated by central banks), and realize there is a finite amount of Bitcoins. You should also know that 1 Bitcoin = 100.000.000 Satoshis. Buying Bitcoin for now isn’t an investment. It’s an exchange of value from flat currencies to a digital one the value is poised to go up until the transition is complete.
Imagine being an early investor in Facebook, say stage one angel investor, now imagine what his $500,000 did for him he now owns 5% or Facebook. Facebook is now worth what 400-500 billion? Don’t be so surprised to see large increases. This is what crypto is all about. Getting in on something the world has interest in. It’s a global phenomenon. Therein lies the value there.
Since inception the price of Bitcoin has gone up 50 fold. If it were to maintain that growth trajectory, its market cap would eclipse the US economy in a few years from now. Bitcoin has gone parabolic and that usually doesn’t end well. To that extent the naysayers are considering it a bubble. While equating its characteristics similar to Tulip, including rapid pace of movement, lots of speculation, non investors jumping in and the titans like CME group, Nasdaq even planning to launch Bitcoin futures. For every asset bubble it’s the same story otherwise level headed people wouldn’t drive prices to unexplainable highs, whether that’s the price of quails, stocks houses or crypto currencies.
That’s why some experts are saying that the rapid price accelerating and price appreciation is unsustainable. It comes down to the rate of return, while stocks give you dividends, real estate yields rent, bonds yield coupons. But Bitcoin has 0 intrinsic value. They so argue that it generates no income asides from an expectation of more price appreciation. Its valuable because people say its valuable.
This argument however is bereft of the technology perspective of Bitcoin. What the naysayers need to understand is that all of blockchain as it is now is dependent on the value of Bitcoin. All these innovative projects that are going to change the world and are already executing ideas will cease to exist if Bitcoin is worth nothing. It’s like saying the Internet is in a bubble. Bitcoin is the store of value for all of crypto like how the dollar is the store of value for the fortune 500 companies. You may ask why then is the need for storing that value? Well in Bitcoin mining, the technology involved is a power hungry consuming loads if electricity. There are investors who have set up massive data center’s with immense storage and compute power to enable mining of the crypto’s. Some one has to bear the costs of this, and that’s the purpose of demand supply. Its becoming of concern that Bitcoin mining is energy intensive . The processors are energy hungry machines such that the local bit coin trader does is fundraising for the energy cost of the data centers operations which are mostly located in Asia because of the seemingly low energy costs in the region.
Secondly, It’s a currency and a global currency for that matter. It can’t be compared to the other bubbles of the past because this is a currency, not a stock or a popular commodity. Tulip bulb mania was nipped in the bud because farmers just planted more tulips and the price crashed down due to excess supply, that’s pretty much the same with our local context of Quail farming. But you can’t farm and grow Bitcoin, not at a rate that could crash the price, reason being that they are finite Satoshis capped at 21M. The more we approach that finite number the more difficulty it is to mine and the more power is consumed hence the rally of the price.
As a transfer of value, there are exchanges that allow Bitcoin lending enabling collecting of interest similar to other forms of passive income like dividends and rent. Gold investment doesn’t pay out any dividend, Bitcoin neither. If put them in CAPM, they have the same beta of <0. Or in short, they share similar characteristics in your investment portfolio. At this use cases evolve, Bitcoin is a store of value, but soon to be a medium of exchange, it’s not a bubble. It’s a nuke!
The downside of Bitcoin stems from the fact that it is a perfect money laundering system for crooks because they can just fake their identities and viola you can deposit money right away a couple if hackers have demanded the ransomware be deposited in Bitcoins. The recent hack of an exchange point to a tertiary threat. When you buy Bitcoins, its held in a central repository called Bitcoin exchange. This exchanges interphase with the consumers in through a website or app and therein lies the existential threat of a hack. The vulnerabilities of this interphases are so pronounced especially so when the value of the assets being hosted within the app is treasurable, there will be endless attempts to hack into the systems. On its etiology, the Bitcoin currency was a preferred means of payment for the underworld due to its peer to peer ability to bypass the prying eye of authorities. It goes then to say that investing in such a venture is indicative of a high-risk appetite.
That’s where the red herring lies, you see a Shilling currency is similar to Bitcoin in a way however paper money is tangible paper money is a monetary tool which is a replacement for gold and paper money and is sanctioned, guided and monitored by the Central Bank. However it has been long since Bitcoin started to circulate the crypto currency and yet world over it has not yet been fully sanctioned by most regulatory authorities.
As an investor, if you want to have this convenience of cryptocurrency there will be need for all of us who see the potential in this to push forward in sanctioning this new trade because without security we would just be in the shark infested waters waiting to be devoured.
Beyond Bitcoin there are developments around Alternative coins. For instance,
There is an opportunity for Mpesa to upgrade into an alt coin by decentralizing its float system and making the float generated transparent then there is an Ethereum use case in tokenisations has a brighter future in democratizing investment in real estate by breaking down the real estate properties into miniature units that can be value derivatives for investment purposes.
But first things first, the government needs to move in and regulate the crypto space to enable innovations to evolve and salve the conscience of potential investors. As for now, just as a chess player, there are 10,000,000 different combinations of an outcomes of chess moves in a chess game and a human mind cannot and to certain extent machines fathom all that, hence why a prognostication approach comes in play.